One screamingly cheap small-cap stock I’d avoid and one I’d buy

Despite performing fairly well over the last year (up 18%), shares in property regeneration businessU and I Group (LSE: UAI) are still way below the highs they achieved back in the middle of 2015. Todays interim results along with the markets subdued reaction to them would suggest that theres still a long way to go before they can recapture their former glory.

In line with guidance

To be clear, theres was nothing particularly awful in todays numbers. Having realised gains of 7.2m in the six months since the end of February (and 2.2m post-period-end), the company believes it is now on track to deliver 65m-70m of development and trading gains over the full year. According to CEO Matthew Weiner, this is in line with expectations and supportive of its three-year target to deliver a minimum of 155m of such gains and total annual returns of 12%. He went on to state that demand for accommodationwithin London, Manchester and Dublin continues to grow as the supply of existing housing stock reduces, suggesting a fairly positive outlook for U and I over the medium term.

So why arent I more bullish? Its mostly to do with the growing amount of debt on the companys books. At the end of August 2016, this stood at 128m. By the end of August this year, this number had climbed to almost 160m. This is despite management attempting to cut costs where it can (a 2m reduction in overheads has been targeted by the end of the financial year) and reportinggood progress on repositioning its investment portfolio, including the identification of 50m of non-core assets for sale.

With returns on capital employed pitifully low and levels of free cash flow anything but consistent, the cheap-as-chips valuation attached to the companys shares at just eight times predicted earnings isnt quite so compelling as it first appears, in my opinion.

Strong performer

Thanks to last months excellent set of final results, I cant help thinking that 370m cap industry peer and strategic land specialist MJ Gleeson (LSE: GLE) might be a better pick.

In the 12 months to the end of June, the Sheffield-based business grew revenue 13% to just over 160m. Pre-tax profit rose 17% to 33m and cash flow increased 42% to 19.7m. In sharp contrast to the aforementioned small-cap, MJ Gleeson had a net cash position at the end of the reporting period of 34.1m. Building on a trend thats developed over the last few years, returns on capital invested also continue to increase, standing at just over 25% for the 2016/17 year.

Over the reporting period, it sold 1,013 units albeit at a slightly lower average selling price than the previous year leading management to set a new target of doubling sales within five years. According to the company, demand for its affordable housing in the North of England currently exceeds supply with buyers queueing on-site during open days.Elsewhere, its South of England-focused strategic land segment reported a record year with the completion of eight sales as a result of strong demand from housebuilders.

Trading on just under 13 times forecast earnings for the new financial year, shares in MJ Gleeson still look very reasonably priced and are expected to offer a 3.7% dividend yield.