But should recent falls in international toy distributor Character (LSE: CCT) and marketing group System 1 (LSE: SYS1) be regarded as a warning to stay away, or an opportunity to get involved? Here’s my take.

Devoid of character?

Having traded as high as 540p at the start of September, shares in Malden-based Character have since lost 30% of their value, driven partly the bankruptcy of Toys R Us in the US and Canada, but also by the company’s international customers becoming increasingly careful with their cash.

Last week’s trading update seems to have stabilised things for the time being. The company reiterated that is had witnessed a “solid finish” to the 2017 financial year with underlying pre-tax profit expected to meet market estimates. Moreover, sales in the UK remain comparable with those of last year and similar to trends witnessed in the toy industry in general.  

So long as investors are able to look beyond the short term, the outlook doesn’t look too bad either. While Character’s management already believes that the company will perform “significantly below” previous market estimates over the next year, a return to growth on the back of new product launches is expected in H2 2018, even if the full effect of this reversal won’t be seen in the numbers until the 2018/19 financial year.

Right now, you can pick up shares in the £82m cap on a bargain-basement valuation of just eight times predicted earnings. That looks a seriously good deal for a business boasting consistently high returns on capital, no debt, and a chunky, fully-covered 4.6% yield.

Big faller

Character’s investors will no doubt sympathise with the owners of  System 1, formerly known as Brainjuicer. Following a number of concerning updates, the latter’s shares have now halved in value since momentarily breaching the £10 mark in May. 

Perhaps unsurprisingly, last Monday’s six-month trading statement appears to have done little to attract investors back to the stock. Confirmation was given that H1 trading had been “slower than expected” after a significant reduction in spending by some of its clients. Indeed, pre-tax profit from the first half is now expected to be around £800,000 – over 70% less than that achieved over the same period in 2016. Factor in reports that the company’s market has become increasingly more competitive and it’s not surprising that System 1’s management remains “cautious” on the outlook for the rest of the financial year, citing a “usual lack of revenue visibility“.

With so much uncertainty around and the stock still trading at 17 times forecast earnings, it would appear many market participants are waiting for signs of improvement before making a move. Next week’s interim results will certainly make for interesting reading.

In the meantime, it’s worth remembering just how well System 1 has performed over the years. Like Character, it’s consistently generated high returns on the money it invests and boasts a net cash position. Free cashflow is excellent. And while its growth status means that System 1 offers little attraction to income hunters, its nine-year dividend growth streak isn’t to be sniffed at.

The company remains on my watchlist.

The post Time to get greedy with these battered small-cap stocks? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Although valuations are now higher than they were even a few months ago, there could still be opportunities for long-term growth investors to buy ahead of improving share price performance.

Uncertain outlook?

Reporting on Thursday was international marketing and market research agency System1 (LSE: SYS1). It announced a rise in revenue growth of 27%, with sales up 13% in constant currency. This helped to push gross profit 29% higher, while profit before tax was boosted by 25%.

This was a relatively impressive result in light of the transition the company is experiencing. It has now completed Chapter 1 of its growth outlook, and is well-placed to commence Chapter 2. This will see it build a larger business through challenging the marketing services industry. The company believes it can offer an improved product, as well as marketing that achieves profitable growth.

Following the update, System1’s share price has fallen by around 10%. The reason for this appears to be slower trading than anticipated during the first quarter of the new financial year. However, it remains confident in its outlook for the full year, with growth in earnings of 41% currently forecast by the market. This puts it on a price-to-earnings growth (PEG) ratio of just 0.5, which suggests it could offer high growth at a very reasonable price.

Resilient growth

Following the general election, the reputation of polling companies such as YouGov (LSE: YOU) seems to have been somewhat restored. After polls in the 2015 general election and 2016 EU referendum which were somewhat mixed, the polls for the 2017 general election were much more accurate in general.

Despite the challenges faced by the industry in recent years, market research company YouGov has been able to grow its bottom line at a relatively consistent pace. It has increased earnings in each of the last five years, with its growth rate averaging 13.6% per annum. This shows that it could offer a relatively defensive outlook at a time when the UK economy is facing significant uncertainty thanks to an unpredictable political outlook.

Looking ahead, YouGov is forecast to grow its earnings by 17% in the current year, which puts its shares on a PEG ratio of 1.5. This suggests they are not yet fully valued after growth of 330% in the last five years. In addition, the company is expected to increase dividends per share by 13% per annum over the next two years, which could act as a positive catalyst on its share price. Therefore, buying the stock now could prove to be a shrewd move.

The post 2 bargain-basement growth stocks that could make you rich appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.