Why I'd dump Purplebricks Group plc for this small-cap

Estate agency firm Purplebricks Group(LSE: PURP) has a great story that captured the imagination of the investment community resulting in a big run up in the stock.

Who can resist the lure of a company that aims to disrupt the cosy world of the commission-guzzling estate agency sector? Purplebrick's hybrid approach uses online technology and on-the-ground local experts to deliver a service with fixed fees, typically lower than the commissions many estate agents charge.

Volatile share price

The stock market saw the potential, catapulting the shares from around 97p in January 2016 to a little over 500p by August 2017. But there's a problem. Despite big advances in annual revenue figures, profits remain elusive. Since the summer, it seems to have dawned on many that enthusiasm for the stock has been bubbling ahead of events and the share price has been falling.

Even mid-morning's 324p level puts the company on a forward price-to-earnings (P/E) ratio around 137 for the year to April 2019 - the year that City analysts expect virgin earnings to materialise. That's high, although earnings could ramp up quickly if the firm keeps posting hefty annual revenue rises.

But what of the share price? I reckon that it could go anywhere over the next couple of years, perhaps down by 50% or more, or maybe doubling from here. Until earnings are a regular and growing feature of the accounts, Purplebricks remains a highly speculative proposition, so I'd rather take my chances with an earnings-producing growth story such as Oxford Instruments(LSE: OXIG).

An agenda for growth

The firm provides technology tools and systems for industry and research. Today's interim results show that things are going well with the order book 1.8% higher than a year ago at constant currency rates. Profit before tax from continuing operations also came in at £12.7m, which compares to a loss of £0.6m at this stage last year.

The directors held the interim dividend firm, but the company used the proceeds from the sale of its Industrial Analysis business in July to pay down debt, from more than £141m last year to around £45m today, which I reckon bodes well for future dividend payments. Meanwhile, the firm has its sights fixed on expansion, saying that it's repositioning itself for long-term growth and margin improvement by building on its "world-class nanotechnology expertise".

Chief executive Ian Barkshire tells us that Oxford Instruments is "enjoying increasingly collaborative commercial relationships," which helps the firm to deliver to its customers "solutions that enable them to succeed at the frontiers of science and within applied R&D and commercial applications."

City analysts following the firm expect earnings to rise 13% during the current trading year to March 2018, and by 8% the year after. And that growth comes a lot cheaper than what's on offer at Purplebricks. At today's 972p share price, Oxford Instruments' forward P/E ratio runs just below 18 for the current year and a little under 17 for next year. I reckon the firm is well worth your further research right now.

Spectacular investments

Indeed, companies with smaller market capitalisation than those lumbering giants in the FTSE 100 can end up making spectacular investments if carefully introduced to a portfolio. But you've got to do your homework, and I recommend getting hold of a copy of The Motley Fool analysts' report called 1 Top Small Cap Stock From The Motley Fool.

The report will help set you on the right path in the world of small-cap investing and you can get it now by clicking here.

Kevin Godbold 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.

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