Renold(LSE: RNO) was up almost 6% in early trade on Tuesday following the release of its preliminary annual results, butthats not a big surprise: the business is back on track, while its performance reads +28.5% since early April.
However, Renold has been beaten by Sirius Minerals (LSE: SXX), whose stock is up 111% during the period why is that, really?
And, equally important, should you continue to bet on either stock?
Renold Is Cheaper Than It Looks
In my opinion, Renold looks like a decent investment case forthe long term, although if you are invested right now and are after quick returns, you may be enticed by the opportunity to cash in, given that its stock hit its 52-week high of 72.5p today.
Maybe Id reduce exposure, but I would not exit the investment.
A supplier of industrial chains and power transmission products with a market cap of 153m, it reported combined pre-tax losses in the region of 13.6m in thetwo years prior to fiscal 2015, which showed today that the group has become profitable again at pre-tax level, in spite of slowly rising revenues.
Cost-cutting will not last forever, but management has shown a commitment to efficiency and higher returns, so I am happy to give it the benefit of the doubt.
A significant pensions de-risking project (was) completed in April 2015, Renold said in its release this element surely contributed to a surge in its stock price in recent weeks.
Its fundamentals, though, also point to a more solid business than in the past: free cash flow is in positive territory, net leverage is under control, while its debt profile is reassuring.
The generation of 5.3m of free cash flow from organic activities represents a significant step change from over a decade of organic cash consumption, Renold pointed out.
The board does recognise the importance of dividends to shareholders, it stated, and this will remain under active review as performance improves further. Assuming operatingincome grows in the double-digit territory, which is a realistic scenario, its forward multiple could drop between 15x and 17x, which makes it a decent buy at 70p a share.
Sirius Is Not CheapEnough
I really struggle to determine the fair value of this potash developer its stock trades at 20p at the time of writing.
Firstly, the shares have rallied based on little evidence that its flagship potash mine project nearYork will ever pay dividends, although it recently announcedencouraging results from certain crop studies.
Secondly, until planning permission is granted, you run arisk of losing around50% of your investment.
Thirdly, trading multiples do not provide a helping hand, given that Sirius is not expected to generate meaningful revenues and profits for several years.
There is talk that Sirius is getting closer to securing planning permissions, but its worth considering that the site sits right on the edge of theNorth York Moors National Park.
How can such a risk be gauged, really?
Youll likely learn more about it by the end of the year. If things go wrong, the shares may wellplummet to between 6p and 12p, where they tradedfor a long time before April.
If you are concerned about Sirius, while the rally in Renold has become less appealing to you, consider the shares of a business under the radar: this 300m growth + value playcould outperform its rivals as well as companies of a similar size and the main benchmark indexes for years to come!
Moreover, I would not rule out a takeover, although its stock doesn’t price in an M&A premium.
Capital gains could be up to 100% a year if it repeats the performance that it has recorded recently: its name can be foundin this brand new report, which iscompletely freefor a limited amount of time.To get your copy right now, click here right away!
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
