Are these 2 out-of-favour stocks set to make a massive comeback?

Arrowings ascending on a chalkboard
Arrowings ascending on a chalkboard

Retailer Pets at Home Group (LSE: PETS) has been in the doghouse with investors for some time, and today’s interims have done little to change that. Its share price is down 1.2% after the group posted a 9.3% drop in underlying operating profit to £39.8m. It also said it may close 30 of its 471 stores.

Dog’s life

The £568m FTSE 250 firm, whose stores offer pet supplies, in-store vets, and grooming salons, has cut prices while restructuring costs in its vets business have increased. Underlying gross margins fell by 160 basis points to 50.3%. Its struggling vets business is in need of an overhaul as its partners struggle to pay the company’s fees and earn enough for themselves, while EU vets leave Brexit Britain, forcing up salary costs.

Underlying group free cash flow rose 17.7% to £27.3m, and the group said the UK pet care market remains resilient, growing at 3-4% a year. Group CEO Peter Pritchard, who took over in May, said Pets has “the ability to offer almost everything a pet owner needs, giving us opportunities our competitors simply don’t have,” and is now delivering a plan for sustainable cashflow and profit growth.

Furry friend

Pets at Home has been caught up in the wider UK retail slowdown and, as Brexit drags, it’s hard to get excited about any stock in this sector. Under the circumstances, today’s report isn’t bad. The problem is that those circumstances include a share price drop of 37% over the last year, and 55% over five years.

This has knocked the valuation down to a bargain price 8.4 times earnings. The forecast yield is a tempting 6.5%, with cover of 1.8, despite the dividend being held at 2.5p per share today. Roland Head reckons it’s too cheap to ignore, and Britons do love their furry friends.

Friend in need

High interest lender Amigo Holdings(LSE: AMGO) is down 1.5% today, despite reporting a rise in revenues and profits in its first set of interim results since floating in July.

Today’s report for the six months to 30 September featured a 40% year-on-year increase in revenues to £130m, and a similar-sized increase in adjusted profit, after tax, to £47.2m. The group also added another 52,000 customers, taking the total to 207,000, a rise of 34%, while its net loan book rose 24% to £671.7m.

Amigo, which now has a market capitalisation of £1.25m and joined the FTSE 250 in September, also announced its maiden interim dividend of 1.87p per share.

Loan arranger

It offers a single guarantor loan product to those unable to get finance from traditional providers. But it also faces headwinds, as today’s figures show the group’s impairment charge rose from 19% to 23% of revenue.

The stock is, nonetheless, up 10% in the last month, and Paul Summers reckons it’s one to watch. Trading at 12.1 times earnings, now could be a promising entry point. City analysts are pencilling in 38% EPS growth in the year to 31 March 2019, and another 17% the year after. By then, the yield is expected to hit 3.7%. Maybe it’s time to add a new friend to your watchlist.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called "1 Top Small-Cap Stock From The Motley Fool".

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle. Click here to find out all about it — it's completely free to do so.

harveyj 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.