Why I'd buy more of this small-cap stock over Provident Financial plc

Provident Financial PFG

After an awful six months which have seen more than 70% knocked of the value of the company, things appear to be stabilising at non-standard lender ProvidentFinancial(LSE: PFG).

According to the recent trading statement (covering the period from the start of July to mid-October), progress on the company's recovery plan for its battered household credit division is consistent with the guidance issued by Provident back in August. A pre-exceptional loss somewhere in the range of £80m to £120m for the full year is still expected.

Elsewhere, Provident's other businesses -- Satsuma, Moneybarn and Vanquis Bank -- appear to be performing reasonably well, even if the last of these is still the subject of an investigation by the Financial Conduct Authority over its Repayment Option Plan.

While stating that management still had a lot of work to do to restore the market's faith in the company, star fund manager Neil Woodford -- a significant holder of Provident's stock -- appears reassured, telling investors in his Equity Income Fund that he remains "supportive" of the new management team's strategy.  Indeed, Woodford added to his position in October. Should investors follow his lead?

I'm still to be convinced. Following the resignation of Peter Crook, the company is still to find and appoint a new CEO. Moreover, the sudden death of Executive Chairman Manjit Wolstenholme last week is another significant blow for the £1.3bn cap, particularly as she spearheaded the fixing of Provident's computer system that had caused issues with the timely collection of payments earlier in the year.

Changing hands for just nine times forecast 2018 earnings, Provident's shares certainly look cheap. Factor in the ongoing issues and a lack of payouts to shareholders, however, and I think investors could do a lot better. Speaking of which...

Value, growth and income

Back in July, I outlined five reasons why I'd added pawnbroker, retail jeweller and foreign exchange operator RamsdensHoldings(LSE: RFX) to my portfolio. Rather satisfyingly, Monday's interim numbers appear to justify my confidence in the market minnow.

As a result of "continued strong growth" in its various divisions, revenue climbed 18% to £21.8m in the six months to the end of September.  A beneficiary of the "higher than anticipated" sterling gold price, Ramsden's pre-tax profit rose a stonking 63% to £5.2m over the reporting period.

As intended, Ramsdens has seen excellent growth at its currency business with the amount exchanged rising 22% to £324m and the number of customers increasing by 15% to 511,000. The more traditional pawnbroking business also performed well over H1 with its loan book growing 18% to £6m. Retail revenue soared by 40% to £3.5m thanks to investment in stock and "improved window displays". Although starting from a low base, the company's online offering is beginning to yield results with gross jewellery sales up an impressive 331%.

Commenting on results, CEO Peter Kenyon reflected that the Middlesbrough-based business had enjoyed a "strong first half of the financial year" and that management remain "confident of delivering further progress" as Ramsdens enters the key festive period.

Taking into account its sound growth strategy, strong balance sheet (£13.4m net cash), decent 3.5% yield and the likelihood of its services becoming increasingly popular in the event of an economic downturn, I continue to think this small cap looks a steal at its current valuation of 12 times forecast earnings. 

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Paul Summers owns shares in Ramsdens Holdings. 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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