This small-cap stock could smash the FTSE 100 this year
Shares in struggling logistics business Connect(LSE: CNCT) have crashed by more than 60% today after the company issued what can only be described as a disastrous trading update.
According to the update, since the beginning of May, when the firm reported a "challenging" start to its financial year, trading performance has continued to be "extremely disappointing," and now management has "materially reduced its expectations for full-year profit before tax."
There's no one single factor behind Connect's problems. The group's three main businesses, Smiths News, Pass My Parcel and Tuffnells are all suffering from falling sales and rising costs.
No light at the end of the tunnel
Connect has been struggling to ignite growth for several years now and management (as well as the City and investors) had hoped that the group's efforts to break into the last mile distribution business, via its Pass My Parcel business, would allow it to profit from the boom in online retailing.
Unfortunately, it now looks as if this dream is dead. Today, Connect has announced the closure of this business. Management is in discussion with clients to "effect as orderly withdrawal as possible."
With Connect's outlook only deteriorating, it's no surprise CEO Mark Cashmore, and CFO David Bauernfeind have both decided to fall on their swords and leave the enterprise. To add insult to injury, it also looks as if the stock's market-beating dividend yield is history. According to today's update, the full-year 2018 dividend will now be "substantially reduced" from the rate paid in 2017.
The last time I covered Connect, I concluded that investors should avoid the company due to its high level of debt, pension obligations and lack of cash flow to support the dividend. With the firm's outlook only deteriorating, I continue to believe that this is the right course of action.
A small-cap set to beat the market
Connect may be circling the drain but one company I'm more positive on the outlook for is Renold(LSE: RNO)
Renold might not be the next Boohoo.com or Fevertree, but it looks to me as shares in this chain manufacturer are just too cheap to pass up. The stock is trading at only six times forward earnings.
Granted, Renold isn't without its own problems. The £71m market cap company has a net pension deficit of £82m. But this obligation declined around 5% over the past year, and should only fall further as interest rates rise. Management is also taking steps in "de-risking this position".
Route to growth
Renold is currently in the midst of a transformation plan called STEP 2020, which is designed to lower costs, improve efficiency and improve sales. As well as streamlining manufacturing operations, the group is also investing in its sales force and hunting for select acquisitions. As STEP 2020 unfolds, City analysts expect earnings per share to leap 190% over the next two years.
And it's this growth that gets me excited. Even though Renold's balance sheet might not be in the best shape, I believe the firm can grow out of its problems. For investors, the risks are also discounted due to the low valuation. At only six times forward earnings, the City seems to have written the business off. A slight improvement in expectations could lead to a big payoff for investors.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo.com. 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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