Shares of small-cap womenswear retailer Bonmarche Holdings (LSE: BON) rose by 10% on Monday morning after the group issued an encouraging set of interim results.
Sales rose by 5% to 97.8m, thanks to like-for-like sales growth of 4.3%. Much of this was driven by an increase in online sales, which rose by 38.6%. In-store like-for-like sales rose by a more modest 1.6%.
The groups pre-tax profit for the first half was 4.2m, more than double the 2m reported for the same period last year. This improved performance lifted the groups operating margin to 4.3%, compared to 2.2% last year.
H1 earnings rose from 3.1p to 6.8p per share, providing a significantly improved level of cover for the interim dividend of 2.5p per share.
The right time to buy?
This niche retailer has lost nearly 70% of its value over the last two years. Difficult trading conditions have hit profits and left the group facing a difficult turnaround. However, todays half-year figures suggest to me that chief executive Helen Connollys strategy to modernise the group may be succeeding.
Im particularly impressed by cash generation, which remains strong. Todays interim figures showed a net cash balance of 14.9m at the end of September. Thats equivalent to almost one-third of the companys market cap.
The latest broker consensus forecasts suggest that Bonmarche will deliver earnings of 12.7p per share this year and a dividend of 7.2p per share. This gives the stock a forecast P/E of 8 and a prospective yield of 7%.
In my opinion, these forecasts look credible after todays results. Given the stocks cash backing, Im tempted to take a closer look at this share for my own portfolio.
A proven winner
Despite my optimism, an investment in Bonmarche isnt without risk. Id only consider this stock as part of a diversified portfolio.
One potential partner for this small-cap turnaround is FTSE 250 food-to-go retailer Greggs (LSE: GRG). The firms move into the coffee and caf market has proved very successful, and helped to drive sales growth of 8.6% during the 13 weeks to 30 September.
A quality buy?
Greggs food and drink may not be everyones first choice. But the groups financial ratios suggest to me that its a high quality business.
Return on capital employed a useful measure of profitability was 25% last year. Thats well above the 15% level I use as a benchmark to identify businesses with above-average profitability. The group also has a strong balance sheet and has maintained a net cash position for a number of years.
Im in no doubt about the quality of this business. The question is how much its worth paying for the shares. The groups adjusted earnings are expected to be broadly flat at 62.7p per share this year, while the dividend payout is expected to climb 4.5% to 32.4p per share.
These forecasts place the stock on a forecast P/E of 21.5, with a prospective yield of 2.4%. Although this may seem pricey, its worth noting that growth is expected to accelerate next year. Analysts are pencilling in earnings growth of 7% and dividend growth of around 12%.
In my view, Greggs could still be a profitable buy if youre looking for a mix of income and growth.
One stock with 200% growth potential
Bonmarche and Greggs may deliver attractive gains. But if you’re looking for stocks with the potential to double or even triple in value, I believe you may need to look elsewhere.
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