Today I'm looking at two contrasting small-cap stocks. One is a stock that I would steer well clear of, while the other appears to be a genuinely exciting investment opportunity, in my opinion.
Once a bulletin board favourite, Nanoco(LSE: NANO) has been a disappointment in recent years. The £60m market cap company manufactures quantum dots - miniscule fluorescent semiconductor nanoparticles that emit different colours, and are used in applications such as lighting, bio-imaging and solar energy. While the technology sounds interesting, Nanoco has failed to deliver for shareholders.
The company's financials don't make for great reading. For example, last year revenue fell to £0.47m from £2.03m the year before, and the group recorded a net loss of £10.6m. While revenue is expected to climb to £1.55m for the year ended 31 July, another hefty net loss of £9.8m is anticipated.
Furthermore, the group has struggled to generate adequate cash flow, and was forced to raise £8.6m last week at a significant discount to the share price at the time. That's clearly a disappointment for existing investors, as the fundraising will dilute their shareholdings significantly.
Nanoco's share price has been locked in a downtrend for the past four years now, declining from around 180p to 26p today. With that in mind, I'll be steering well clear of the company.
However, as a contrast, one small-cap company that looks very interesting, in my opinion, is £140m market cap Bioventix(LSE: BVXP). Trading at just under 1,400p at the start of the year, the shares now change hands for 2,900p, a year-to-date gain of over 50%. Furthermore, since moving to AIM in 2014, the stock has risen by an amazing 400%.
So what's all the hype about and more importantly, can the momentum continue?
Bioventix specialises in the development and commercial supply of sheep antibodies for use in immunodiagnostics. Antibodies are proteins that are produced by the immune system to help stop viruses, infections, bacteria and disease harming the body, and Bioventix claim that its sheep-derived antibodies are more effective than traditional rodent-based varieties. The firm earns revenue by licensing its products to other companies that use them for clinical diagnostic applications such as blood testing.
A glance at Bioventix's financials reveals a spectacular set of numbers. Over the last three years, revenue has risen from £2.7m to £5.5m, and earnings per share have surged from 30p to 68p, a compound annual growth rate (CAGR) of 31%. Equally impressive have been the company's operating margins and return on equity, which last year, were 76% and 42% respectively. Dividend growth of 190% over the last three years has also been recorded.
Interim results in March saw sales rise 32% to £3.1m, and profit before tax increase 49% to £2.5m. Then, in early September, the group upgraded its full-year profit guidance, stating: "Both revenues and profits before tax are expected to be ahead of market expectations for the year ended 30 June 2017."
So it's pretty clear, to my mind, that Bioventix has strong momentum at present. Is it too late to jump on board? On consensus FY2017 earnings estimates of 89.3p, it currently trades on a P/E ratio of 32.5. While that valuation is no doubt high, it doesn't look entirely unreasonable in my view, given the company's track record and growth prospects.
Another fantastic growth candidate...
Bioventix looks like an excellent growth prospect to me, however, I'd like to introduce you to another top candidate.
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Edward Sheldon has no position in any 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.