Why I'd avoid Versarien plc and buy this 10-bagger instead

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2017 has without a doubt been the year of the UK small-cap stock. Many smaller companies, especially in the tech sector, have performed spectacularly well. Versarien(LSE: VSR) is one such that has seen its share price explode in a short period of time. Its shares are up more than 250% since the start of November. Is it worth buying now? Here are my thoughts.

Story stock

The £115m market cap company describes itself as an "advanced materials engineering group." Founded in 2010, it uses proprietary materials technology to create innovative engineering solutions that are capable of having a "game-changing" impact on a broad variety of industry sectors.

The group specialises in a product called Nanene, a particular type of graphene. Graphene is an extremely strong material, 200 times stronger than steel. It can conduct both heat and electricity efficiently, and therefore could possibly replace copper in a broad array of applications in the future. Versarien claims its patent protected manufacturing techniques allow it to manufacture Nanene in large volumes at market leading prices and that it has "significant interest" from original equipment manufacturers (OEMs) worldwide.

The story certainly sounds exciting but is the stock a good investment right now? I'm not convinced.

For a start, Versarien is not profitable yet. While half-year revenue recently increased 167% to £4.4m, the company recorded a loss of £0.8m.

With no earnings forecast, we can't place a P/E on the company. However, one valuation metric we could use is enterprise value (EV) to sales. So how does the company shape up on that metric? Well, Versarien has a ratio of 15.2 this year's estimated sales. By comparison, more established rival Morgan Advanced Materials (which as its name suggests also deals in 'advanced materials') has a ratio of just 1.1. That indicates Versarien is expensive.

Analysts at Stockopedia also point out that the company's gross profit margin is quite low. For the recent half year, the gross profit margin was 24%. By comparison, Morgan has a ratio of around 60%.

Lastly, while CEO Neill Ricketts had quite an entrepreneurial background, I'm not seeing a great deal of experience on the board. As a result, I won't be investing in Versarien yet.

10-bagger

One growth stock that does look interesting to me right now is JD Sports Fashion(LSE: JD). Over the last five years, its shares have enjoyed an incredible rise, surging from 37p to 450p in May this year, a gain of over 1,100%. However, in the last six months, the share price has pulled back considerably, and I believe the stock now offers strong value.

Unlike Versarien, JD Sports is a highly profitable company. The high street chain has benefitted enormously from changing trends in sportswear in recent years, and as a result, profits have skyrocketed. Last year, earnings rose from 12p to 19p per share. This year, analysts expect a figure of 23p, an increase of approximately 20%. For the most recent half-year period, sales rose 41%.

And yet JD shares don't look expensive. After pulling back from 450p to 330p today, the stock's forward P/E ratio is just 14.3. In a market where many growth stocks are trading at expensive valuations, JD Sports stands out as a growth stock trading at an attractive price, in my opinion.

Another fantastic growth stock opportunity...

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Morgan Advanced Materials. 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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