Why I'd dump UK Oil & Gas Investments plc for this small-cap

The surge in the share price of UK Oil & Gas Investments (LSE: UKOG) during July and August, from around 1p to today's 7.32p, gave investors a return of more than 600% in short order.

Explosive movements like that don't arrive every day in the world of small-cap investing, but if we are on the right side of them when they do, such outcomes can really boost a portfolio's value - as long as a share-price reversal doesn't come along to take some or all of the gains away again.

What about the downside?

UKOG is a popular stock, and the movement was driven by speculation based on news of the firm's potentially big oil discoveries beneath the Weald Basin in Britain. Today's market capitalisation of a little over £259m appears to factor in much future success with regard to developing the oil field to production.

However, I think a lot of potential exists for the market cap to reduce, as the reality of getting oil from the ground sinks in, or if the find turns out to be smaller than the company believes, perhaps because of complicated geology presenting pockets of oil that can lead to bad assumptions about the quantity of oil discovered in the entire field.

If I was sitting on big gains from an investment in UKOG, I'd nail down profits by taking at least some money off the table now.

Legacy challenges

Meanwhile, St Ives(LSE: SIV) has become a value proposition with the potential to turn around. There is a big pension liability, but the firm is certainly no riskier than UKOG right now, in my view, and I find the stock attractive.

The marketing services firm posted ugly full-year results today, but I think it's worth looking deeper. Although revenue increased by 7% compared to a year ago, adjusted basic earnings per share declined 24% and the directors sliced 75% off the full-year dividend.

Problems exist in what the firm calls its "legacy" Marketing Activation and Books segments. Although the firm enjoys strong market positions in those areas, competition is relentless and margins are under pressure. The directors reckon they are acting to reduce the costs in both divisions to "reflect the new market realities."

Hidden growth

So far, so challenging, but St Ives also reports "encouraging" underlying progress with its core Strategic Marketing segment, which the directors say "lies at the centre of our long-term growth strategy." I reckon situations like this can work out well for investors as a new, vibrant business emerges from the wreckage of the old. During the year to July 2017, the Strategic Marketing operation delivered 42% of the firm's overall revenues and 75% of adjusted operating profit, so it's a significant line of business. Revenue in the division grew 13% during the year, 5% of which mushroomed up organically, suggesting market-share gains from a popular offering.

On top of 'hidden' growth, St Ives is making progress reducing its borrowings and shaved a third off its debt burden during the year, representing another important indicator moving in the right direction. The share price is responding to the company's turnaround efforts, up just over 100% since May. At today's share price near 78.5p, the forward price-to-earnings ratio runs a little over 6.5 for the year to July 2018, and I think the trend has further to run.

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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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