Today’s figures show that revenue increased by around 7.6% compared to the equivalent period last year, but adjusted earnings per share fell by 8%. There’s nothing the stock market hates more than falling earnings, so I think we’ve found the reason for the weakness in the share price. The directors held the interim dividend firm at last year’s level.

Big acquisition

In July, towards the end of the period, the company spent almost £22m acquiring Hughes Group Holdings Limited, which came with a “significant Mercedes-Benz presence in the M4/M40 corridor.” I think that’s a bold move with so many economic uncertainties on the horizon. The balance sheet was weakened and the firm reported net debt on 31 August of £8.7m, which compares to a net cash position of £20.8m the year before.

Car dealership businesses are notoriously cyclical and when trading conditions have been good and profitable, I reckon it makes sense for them to build up their cash reserves so that they can survive the next downturn in the economy. Indeed, the current trading and outlook statement is a little murky and highlights several risks.

The company said that supply-side issues in the new car market led to declining volumes “with September registrations being the lowest since 2011.” September trading was affected by Worldwide Harmonised Light Vehicle Test Procedure (WLTP) emissions regulations across the European Union. Meanwhile, car margins are under pressure because the depressed level of Sterling is affecting manufacturers’ profitability. The firm reckons some supply issues are “likely to continue into early 2019.”

Give me steady demand

Demand for cars is holding up for the time being but the directors admit that political uncertainty in the UK could lead to consumer uncertainty and volatility for the rest of the firm’s trading year. The company goes on to list a number of positives, but the stock market looks wary of the stock to me. And I share the market’s concerns. Despite the firm’s high-looking dividend yield and substantial asset backing from the property it owns, I think the shares are vulnerable to downside shocks, so I’d rather invest in a less cyclical firm such as pharmaceutical outfit GlaxoSmithKline (LSE: GSK).

One of the main attractions of the firm to me is that its pharmaceutical business resides at the opposite end of the defensive/cyclical scale from Vertu Motors. Unlike big-ticket purchases such as cars, people keep buying their medicines whatever the economic climate and such reliable repeat-purchasing tends to lead to consistent cash inflows.

On top of that, GlaxoSmithKline is paying a bigger dividend than Vertu Motors anyway. The recent share price close to 1,487p throws up a tempting forward yield of 5.4% for 2019. I think that GlaxoSmithKline is recovering well from a period of declining earnings as previously best-selling drugs lost their patent protection. I’d rather take my chances with the firm’s forward prospects than with the uncertain outlook of a cyclical firm such as Vertu Motors.

The post Is the GlaxoSmithKline share price a bargain or should I buy this high-yielding small-cap? appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Vertu Motors. 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.

Shares in Vertu Motors (LSE: VTU) fell 2% this morning despite first-half profit before tax rising 29.4% to £24.4m. 

This figure was boosted by a £4.1m exceptional profit on the sale and leaseback of property. Even if we strip this out, operating profit rose 3%, so why is the market valuing Vertu at only 7.6 times earnings? 

Firstly, car dealerships are pretty low margin businesses. Even including that property sale, operating profits were only 1.7% in the first half.

Another important factor is the fall of sterling since Brexit was announced, leading to a significant rise in the price of new vehicles. This, combined with concerns about the economy, is impacting new car sales significantly. 

The company points out that “UK new vehicle private registrations in September 2017 were down 8.8%” while “the group’s September like-for-like new vehicle retail volumes fell by 14.8%”. Its no wonder the market isn’t enamoured with Vertu right now. 

If you’ve got the stomach for it however, I believe this negative sentiment could represent a buying opportunity. That’s because Vertu doesn’t make the majority of its cash from new car sales, but from fixing up older ones in its after-sales department. 

A reduction in new cars increases the average age of those on the roads, and older machines require more TLC to keep on trucking. Aftersales like-for-like sales grew 4.4% in the first half and I expect this could continue. 

What’s more, Vertu’s has grown to be one of the largest UK car dealerships in roughly a decade via a solid acquisition strategy – and I believe it can continue to consolidate this fragmented market to great effect for shareholders. 

Could the shares double by 2019? They were valued nearly 70% higher before Brexit, so if sentiment improves it is distinctly possible, especially given the solid acquisition strategy. 

A revitalised retailer 

Due to a rapid expansion and wonderful capital allocation history, investors used to view Next (LSE: NXT) as an upper-echelon retail stock, but dampened high-street footfall and rampant online competition has soured sentiment towards the company. 

The question facing Next, then, is can the very best retailers thrive in a world of online shopping, or is the bell tolling for all brick-and-mortar organisations? 

The company’s first-half results came in at the cautious end of expectations, with a 5.7% jump in Next Directory sales failing to offset the ailing retail stores division, where sales fell 8.3%. In total, the group’s revenues declined 2.2%. 

The large fixed cost base meant that a relatively small sales decline hit store portfolio profitability to the tune of 33%. Ouch.

This is clearly a pressing issue, but at least management isn’t burying its head in the sand. They company said it has “taken a long hard look at the future of our Retail business.” After stress testing, it claims the stores could still produce £1bn cash even if sales fell 57% over 10 years. 

This worst-case-scenario estimate includes no reduction of rent costs, which also seems unlikely given the falling value of high street property. Within 10 years, 72% of the company’s leases (by value) will have expired and I believe it will be able to negotiate lower rent costs. 

In conclusion, I sincerely doubt Next shares will double any time soon, but I still see value in the business in the long term. The company trades on about 12 times the consensus earnings estimate for this year, which seems a fair price to me.

The post Could these value stocks double by 2019? appeared first on The Twelfth Magpie.

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Zach Coffell has no interest in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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.

For the period, the automotive dealer reported growth across the board with revenue up 16.5% to £2.8bn and adjusted profit before tax up 15% to £31.5m. Unfortunately, this increase isn’t reflected in earnings per share, thanks to an increase in the firm’s share count from 350m to 400m at year-end. As a result, earnings per share for the period only rose 1.3% to 6.14p. Still, all other important metrics showed impressive growth. Pre-tax profit rose 14.6%, and tangible net assets per share increased 3.1%, although if you readjust for the higher share count, net assets per share increased by more than 20%.

Further growth ahead?

Vertu was founded with the goal of creating a significant player in the UK motor sales industry by consolidating a highly fragmented market. Management has been highly adept at accomplishing that aim so far with revenue growing by 19.4% per annum on average since 2011 as acquisitions have helped boost growth. 

Management has adopted a sensible acquisition strategy, only buying what it can afford. And despite having increased book value from £97.5m in 2011 to £250m today, the company has little in the way of debt, with a net cash balance of £21m reported at the end of February.

Over the past five years, Vertu’s net profit has grown at a rate of 38.7% per annum, but despite this explosive rise, investors are still giving the company a wide berth. At the time of writing shares in Vertu are trading at an estimated forward P/E of 7.8 based on analyst forecasts for the year ending 28 February 2018. The shares support a dividend yield of around 3% and the per share payout has grown by 100% since 2013.

It would appear investors are concerned about the group’s exposure to the UK economy following Brexit. However, today’s results should go some way to allaying these concerns, and if management can repeat the performance of the past five years, there should be lucrative returns on the cards for shareholders.

Cash rich

Brick producer Michelmersh Brick (LSE: MBH) may not be the most exciting company trading on the London market, but that doesn’t mean it’s a bad investment. 

Over the past five years, the firm has gone from strength to strength, benefitting from the boom in UK housebuilding. Since 2012, shares in the company have risen by nearly 200% excluding dividends as pre-tax profit has risen tenfold. 

Unfortunately, during the past two years, growth has slowed, but management has been focused on reducing debt. At the end of 2016 the group reported a year-end cash balance of £4.7m, which should finance asset expansion and sales growth. Even though the shares appear pricey at 15.2 times forward earnings, Michelmersh looks well placed to return to its growth trajectory as the demand for its products remains robust. The shares currently support a dividend yield of 3%, and the payout is covered twice by earnings per share.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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.

The key to margins so astronomically high is the company’s business model of running an asset-light online platform that charges private sellers and dealers a fee to list their automobiles on the service. And because the company’s website brings in an average of 250m views per month it can charge customers a hefty fee. In H1 2016, the average fee per retailer rose 13.3% year-on-year to £1,526 per month.  

This helped boost revenue during the period by 11% to £153.9m. And with just 830 employees and contractors in the six months, operating margins rose to a whopping 65%. The company is also assiduously slimming down its overall capital expenditure and reducing marketing spend as a percentage of revenue as sales grow.

These actions helped increase operating cash flow to £101m. The bulk of this was used to repurchase £49m worth of shares with an additional £25m directed to reducing the pile of debt the company’s former private equity owners saddled it with before taking it public. These payments reduced net debt to £359m at period end, which brought leverage down from 2.2 times EBITDA to 1.8 times.

There are concerns that the company could face declining numbers of customers in the coming quarters as a huge stock of leased vehicles hit the used car market, which would dent small car dealerships’ margins and force some out of business. This may be beginning to play out as total advertisers in H1 declined 1% year-on-year.

Still, with the company growing sales, profits and cash flow at a rapid clip there’s plenty of reason to be interested. As the company whittles down its debt, there’s also plenty of potential to increase share buybacks and begin dividend payments. With its shares pricey at 26 times earnings, a significant amount of growth is baked into valuations. But Auto Trader is still one growth share I’d love to own.

Just a wee bit lower margins

One of Auto Trader’s many large customers is car dealership Vertu Motors (LSE: VTU). Unsurprisingly, running a chain of bricks and mortar dealerships is a significantly less profitable business than hosting an online bulletin board. Vertu’s operating margins clocked in at a meagre 1.3% in the six months to October, the last period for which financials were reported.

Still, the company is growing quickly and its rollup model of acquisition has transformed it from the UK’s 13th largest dealership group in 2007 to the fifth largest today. This growth is continuing at a rapid rate and in the final five months of the financial year, revenue grew 16.6% year-on-year, thanks to acquisitions and a very solid 4.8% bump in like-for-like sales.

It’s also encouraging to see high-margin and less cyclical services make up an increasing percentage of overall sales. In H1 they accounted for 7.8% of revenue, up from 7.6% the year prior, and made up a full 39.4% of the group’s gross margins.

If the economy continues to grow at a steady rate, investors may find Vertu’s business model of ‘acquire, improve margins and acquire again’ an attractive opportunity. And with the company’s shares trading at just 7.9 times forward earnings and offering a 2.7% yield, there’s plenty more to like.

The post One company with 60%+ operating margins I’d buy right now appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Auto Trader and Vertu Motors. 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.

A cash-rich budget brand

Footwear retailer Shoe Zone (LSE: SHOE) operates at the budget end of the market. This small cap is a familiar site on UK high streets, but also sells online.

The group’s strengths lie in sourcing footwear cheaply from contract manufacturers abroad and keeping costs low at home. This lean business model generates an operating profit margin of 6%, with strong free cash flow and no debt.

Consumer spending is expected to come under pressure next year, but Shoe Zone’s specialist focus on value should help to protect sales. Management also has a big stake in the business — founders Anthony and Charles Smith own 50% of the group’s shares.

Shoe Zone currently trades on a forecast P/E of 10, with a prospective dividend yield of 5.8%. Demand for this generous income could push the shares higher in 2017, if trading remains stable.

Big tech player looks cheap

Shares of electrical and tech retailer Dixons Carphone (LSE: DC) have fallen by 32% over the last year. However, earnings forecasts for the group have been much more solid, and are only 4% lower than they were a year ago.

Dixons’ like-for-like sales rose by 4% to £2,988m during the first half of the current financial year, while underlying pre-tax profit rose by 19% to £144m. Net debt is just £285m, giving the group a strong balance sheet.

This company’s large scale and combination of online and offline operations seem to make it competitive against big internet retailers. It’s also expanding fast in southern Europe.

With a forecast P/E of 11 and an expected dividend yield of 3.1%, I believe the shares are now starting to look too cheap. Medium-term investors could easily see a gain of up to 30% from current levels, in my view.

A deceptively safe buy?

Listed car dealership groups were big losers after last year’s Brexit vote, but there are some signs that this sell-off was too hasty.

Shares of AIM-listed Vertu Motors (LSE: VTU) are worth 27% less than they were at the start of June last year, but profit expectations are little changed from the start of 2016. Investors appear to be nervous about a slowdown in new car sales. But it’s worth remembering that new car sales don’t generate much profit for car dealers.

Companies such as Vertu make the majority of their profits from after-sales work and from used cars. For example, 72% of Vertu’s gross profit came from after-sales and used cars during the first half of last year.

New cars are usually serviced by the supplying dealer while they’re under warranty. This means that recent years’ strong sales should translate into a guaranteed stream of profitable after-sales work.

Vertu shares are currently trading on a forecast P/E of 7.2, with a prospective yield of 3.1%. If profits remain stable this year, I believe the shares could be re-rated onto a significantly higher valuation.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

In this article I’ll explain what’s gone wrong at Motorpoint and highlight why I believe car dealership group Vertu Motors (LSE: VTU) is likely to be a far more profitable (and safer) investment.

Referendum hits sale

Motorpoint shares fell by 20% this morning, after the company said that uncertainty following the EU referendum had forced management to cut prices. Used car dealers tend to rely on financing to fund their stock purchases, so they can run into problems quite quickly if stock levels get too high. Slashing prices is generally the only way to speed up sales.

Today’s statement says that both sales volumes and profit margins were below expectations during the first half. However, group revenue rose by 11% and like-for-like sales were positive.

My reading of this is that the three new sites opened over the last 12 months are probably providing most of the revenue growth, with modest like-for-like growth at some existing locations. As Motorpoint has chosen not to provide more detailed figures, I think it’s prudent to take a fairly cautious view of the group’s revenue growth.

Current broker forecasts indicate that Motorpoint was expected to report full-year earnings of 16.8p per share this year. The company says that trading has improved during the second half, but I’d still expect these forecasts to be downgraded slightly after today’s news.

Buy or sell?

I’m guessing that around 10% will be shaved off broker forecasts after the news. This would leave Motorpoint shares trading on around 8.5 times forecast earnings, with a prospective yield of 3.2%.

These figures may look attractive, but it’s worth noting that Motorpoint only floated in May and has already issued a profit warning. We don’t yet know how credible management guidance really is.

A second weakness of this business is that it’s dependent on low margin car sales. Unlike franchised car dealers, used car supermarkets can’t use sales to build up a pipeline of more profitable after-sales work.

As you can probably guess, I won’t be investing any of my cash in Motorpoint shares.

A better buy?

I’m much more attracted to car dealer group Vertu Motors. This well-established firm is the fifth largest motor retailer in the UK, with more than 130 dealership locations. Vertu’s share price was hit hard by the referendum vote and is down by 46% so far this year.

However, the group’s trading has remained strong. Revenue rose by 17.7% to £1,454m during the first half, while pre-tax profit rose by 14% to a record high of £18.7m. Vertu has no debt and reported strong trading during the plate change month of September.

Management expects full-year results to be in line with expectations. This gives the stock a forecast P/E of 6.7 and a prospective yield of 3.3%. In my view, this could be a good opportunity to invest in a company that’s out of favour but has strong fundamentals.

The post Are these growth stocks still a buy after today’s news? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The housing sector has been shaken by fears of tanking home sales in the wake of the Brexit referendum. But Telford Homes — like many of its peers — has put these fears to the sword, advising that “the board remains confident in the longer term housing market in non-prime London and has not adjusted the group’s growth targets since the outcome of the EU vote.”

Indeed, the capital city-focused homebuilder noted that sales activity has picked up during the past six weeks, and remains optimistic that the “long-term imbalance between the supply of homes and the demand for somewhere to live in non-prime areas of London” creates a bright future for the company.

Data surrounding the homes market continues to be erratic, but some shock was expected given the importance of June’s vote for the British economy. Regardless, like Telford Homes itself, I believe the business remains a promising stock selection, with a combination of low interest rates and a longstanding housing shortage likely to keep supporting property values.

The adverse timing of development completions between April and September is expected to push earnings 9% lower in the year to March 2017, although a 25% bump is predicted in fiscal 2018 as the number of completions stride higher again.

Consequently Telford Homes is expected to lift last year’s dividend of 14.2p per share to 15.4p this year and to 16.8p in 2018, projections that yield 5% and 5.5%. I reckon the housebuilder remains a sage pick for both growth and income investors.

About to stall?

At first glance Vertu Motors (LSE: VTU) may not be an obvious candidate for dividend chasers.

The company is predicted to pay out 1.4p per share to its shareholders during the year to February 2018, yielding 3%. This figure lags the London blue chip average of 3.5% by a little distance. And next year’s projected dividend of 1.6p also falls short in this regard, creating a yield of 3.4%.

Still, many investors will point to Vertu Motors’ dividend growth rates as reason to invest. If realised, this year’s projection will mark a chunky 8% year-on-year improvement on 2015’s 1.3p dividend. And 2018’s reward will represent a 14% yearly increase.

While these projections are also well covered by projected earnings — Vertu Motors sports dividend coverage of four times through to the close of next year, double the broadly-regarded safety mark of two times — I reckon dividend growth rates may come under pressure in the longer term.

The copany advised on Wednesday that revenues had surged 17.7% between March and August, to £1.45bn, and that it has “not experienced any significant change in consumer behaviour” since the EU referendum.

But unlike Telford Homes, I believe it could see sales fall back over the next year and potentially beyond as consumers cap spending on discretionary big-ticket items like cars. While this isn’t yet a given, in my opinion investors seeking stronger dividend prospects may be better off looking elsewhere.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Shares in car dealers were hammered by the UK’s Brexit vote and haven’t fully recovered. These stocks now look cheap, but an uncertain outlook is holding back share prices.

In this article I’ll look at today’s trading update from Vertu Motors (LSE: VTU) and ask whether investors should buy into this cheap-looking UK group, or focus their cash on Vertu’s larger and more global peer Inchcape (LSE: INCH).

Strong trading?

Vertu Motors’ share price rose by 3% this morning, after the group said that full-year results are expected to be in line with current expectations. This puts the stock on a forecast P/E of 7.9 and a dividend yield of 2.8%.

These certainly seem attractive figures. Vertu says trading during the first half was “robust,” with “profitability ahead of last year.”

Increasing profit margins is a key challenge for the group. The margins on new cars are very low, but used cars and after-sales are far more profitable. Vertu’s operating margin has risen from 0.6% in 2011, to 1.1% last year. Yet this is still lower than most peers, so further gains should be possible.

The argument for investing today is that several years of strong new car sales have created a reliable stream of profitable after-sales work on cars under warranty. This should support Vertu’s profits even if new private car sales continue to slow.

Vertu also has a strong balance sheet, with plenty of freehold property and net cash. Tangible net assets totalled 38p per share at the end of February.

At 50p, Vertu looks a reasonable buy to me. But I’m not sure if the stock will rise above last year’s peak of 79p in 2017. With new car sales already at record levels, more modest growth seems likely to me.

Is bigger better?

Inchcape has a market value of £3bn, 15 times larger than Vertu, at £193m. However, what’s most interesting about this comparison is that Inchcape’s sales over the last year were only three times greater than those of Vertu.

Inchcape’s market cap is much higher because it’s much more profitable than Vertu with it 1.1% operating margin last year, whereas Inchcape managed 4.5%.

The upshot of this is that Inchcape is expected to report a net profit of £241.3m for 2016, 10 times greater than Vertu’s expected profit of £23.6m.

Inchcape’s profit margins are higher because it operates as an overseas distributor to many car manufacturers, as well as a retailer. During the first half of this year, 73% of Inchcape’s trading profit came from distribution.

The superior profit margins of this business mean that Inchcape has a stronger valuation and offers a higher dividend yield. Here’s how it compares to Vertu based on Reuters’ consensus forecasts for the current year:

Both Vertu and Inchcape have net cash or minimal debt and are expected to deliver mid-single-digit earnings growth this year. Inchcape’s global diversity could make it a safer buy than Vertu, as it shouldn’t suffer too much from any regional downturns. Further growth seems likely to me over the next couple of years.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

TT’s growth is being driven by the recent acquisition of Aero Stanrew and by favourable exchange rate movements compared to last year. Excluding Aero, the firm’s order book is flat on last year. But management believes the integration of Aero will help to drive further profit growth, boosting earnings.

Chief executive Richard Tyson said this morning that he’s confident TT can deliver “sustainable profitable growth in the medium term”. Earnings per share are expected to rise by 10% this year and by 14% in 2017. This puts the shares on a 2016 forecast P/E of 14, which seems reasonable to me. The forecast 4% yield is attractive and earnings forecasts have been rising steadily since December.

I’d like to see some reduction in net debt before the dividend goes any higher, but I believe further gains are possible after today’s news.

Hidden upside to mining assets?

Mining royalty firm Anglo Pacific Group (LSE: APF) issued an interesting update this morning, highlighting what could prove to be hidden value in its portfolio.

Anglo owns a 1% royalty agreement on the Spanish and Portuguese assets of AIM-listed uranium miner Berkeley Energia. This royalty was held on Anglo’s books at its 2009 purchase price of $4.1m.

Earlier this week, Berkeley secured a new funding deal with another investor, who paid $5m for a 0.375% royalty interest in the same assets. This implies that Anglo’s 1% royalty could be worth $13.1m, more than three times its current book value. Anglo also owns a 16.6% stake in Berkeley that I estimate is currently worth about $13.4m.

In total, Anglo’s stake in Berkeley appears to be worth around $17.2m, or £11.9m. Assets such as these could help generate shareholder returns in the future.

In the meantime, Anglo Pacific stock offers a forecast dividend yield of 8%. As you might expect, this isn’t covered by earnings, but the firm has committed to maintaining a 6p per share payout during this difficult period.

Anglo Pacific’s profits are expected to double in 2017. With commodity prices stabilising, now might not be a bad time to take a closer look.

Driving profits higher

Today’s final results from car dealer Vertu Motors (LSE: VTU) were very good. I was surprised not to see the shares jump higher, given that they’ve fallen back by 24% from their January high of 78p.

Revenue rose by 16.8% to £2,423m last year, while adjusted earnings per share were 24.5% higher at 6.46p. That’s slightly above recent forecasts, and puts Vertu on a trailing P/E of just 9.2.

I’ve been cautious on car dealers because they’re traditionally quite cyclical businesses. But the move by many customers to personal lease plans could mean that replacement cycles and servicing demand will be more regular and predictable than in the past. That’s important because after-sales are a key source of profit for car dealers.

Vertu said this morning it expects earnings to continue rising in 2016. With a low valuation, plus £23.1m of net cash and a 2.3% forecast yield, I think further gains are quite likely.

The post Could small caps Anglo Pacific Group plc, Vertu Motors plc & TT Electronics plc deliver 50% gains? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of Anglo Pacific. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, the main reason for Dart Group’s share price rise has probably been the anticipated rise in its profit. For the financial year to 31 March 2016, Dart is expected to have recorded a rise in its bottom line of 71% and so its share price increase could have been due to improving investor sentiment.

Looking ahead, Dart is forecast to record a fall in net profit of 13% this year and 31% in the following year. This could cause investor sentiment to come under a degree of pressure, but with Dart having a price-to-earnings (P/E) ratio of just 11.6, its margin of safety seems to be sufficiently wide to merit purchase even with a rather uncertain outlook.

Improving sentiment

Also rising in the last year have been shares in Vertu Motors (LSE: VTU), with the automotive retailer recording a rise of 8%. As with Dart Group, much of this rise has been due to improving investor sentiment in the outlook for Vertu’s operating sector. Although concerns have arisen for the growth of the Chinese economy, the automotive sector continues to offer a robust growth outlook.

Evidence of this can be seen in Vertu’s earnings forecasts. In the next two years its bottom line is expected to rise by around 12%, which is a relatively impressive rate of growth. However, when this is combined with Vertu’s P/E ratio of just 9.7, it equates to a price-to-earnings-growth (PEG) ratio of only 0.8. This indicates that Vertu’s share price could be set to rise at a rapid rate. And with it having a yield of 2.5% from a dividend which is covered over four times by profit, there are likely to be excellent dividend prospects ahead.

Power performer

Of course, Vertu and Dart Group’s share price rises are rather disappointing when compared to 88 Energy’s (LSE: 88E) 422% gains since the turn of the year. The reason for such a rapid rise in its valuation has been positive news flow, with 88 Energy making a major discovery in the US and following that up with an increase in the independent resource estimate for the Icewine project in Alaska.

While further gains can’t be ruled out, 88 Energy remains a highly volatile and relatively risky stock to hold. For example, its shares have been up by as much as 775% this year but have slipped back somewhat. As such, buying could lead to major gains or losses in the short run and while 88 Energy has the potential to make strong gains in the long term, it may be best to look elsewhere for more balanced risk/reward opportunities unless, of course, you’re a less risk-averse investor.

The post Are 88 Energy Ltd, Dart Group PLC And Vertu Motors Plc 3 Must-Have Small-Caps? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Dart Group and Vertu Motors. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.