Sirius Minerals (LSE: SXX) is continually one of the most traded shares on the London Stock Exchange. It seems the long-term growth story (the company could eventually be one of the largest fertiliser producers in the world) has captured the minds of many UK investors.
However, personally, I’ve never been tempted to touch the shares and I’ve warned investors about the dangers of investing in companies such as Sirius in the past.
To my mind, SXX is a classic ‘jam tomorrow’ type of stock. Yes, there’s an interesting growth story. But at the same time, profits could be a long way off. This adds a lot of risk for investors.
The last time I covered the shares in mid-March, they were trading at 20p. Now, they’re at 16p after recent news the shares will be diluted heavily. This fall doesn’t surprise me at all.
Overall, I see Sirius shares as quite risky and I’ll be continuing to avoid the stock for now. I think there are much better small-cap growth stocks out there.
Focus on profits One thing I’ve learned over the years is that focusing on smaller companies that are already generating profits can be a much safer investment strategy, as it tends to reduce your chances of getting burnt. And one example of this kind of smaller company is foreign exchange specialist Alpha FX (LSE: AFX). Its shares are up 42% this year, versus a fall of 25% for SXX.
An under-the-radar stock, Alpha specialises in FX hedging services for small- and medium-sized corporate clients. Its customers include the likes of ASOS (LON:ASOS) and Halfords. The group has enjoyed rapid growth over the last few years, with net profit rising around 900% between 2014 and 2018. Profitability is extremely high with return on equity (ROE) averaging 60% over that period.
Strong growth Recent full-year results from Alpha were very impressive, with revenue increasing 73% for the year and underlying basic earnings per share (EPS) surging 30%. The company also reported a 55% increase in clients and hiked its final dividend 35%.
But what I think is most interesting here is the fact the company said it’s “barely scratching the surface of the group’s potential,” which suggests there could be plenty more growth to come here.
Valuation Alpha FX shares have had an excellent run over the last 12 months, rising around 60%. After that kind of gain, the shares no longer offer as much value as they did. However, I wouldn’t necessarily let that put you off the investment case.
At present, there’s only one broker covering the stock and it has an EPS forecast of 24.3p for FY2019. Yet that forecast looks a little low to me. Last year, EPS came in at 22.7p per share, and for the last two years earnings have grown at around 30% per year.
So, even if we take a conservative growth projection and assume that EPS rise 20% this year, we could be looking at EPS of 27.2p for FY2019, which gives a forward-looking P/E ratio of around 29.5 at the current price. I think that’s still a reasonable valuation for this kind of fast-growing company. As such, I continue to rate Alpha FX shares as a ‘buy’.
Edward Sheldon owns shares in Alpha FX. The Motley Fool UK owns shares of and has recommended ASOS. 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.
Motley Fool UK 2019