Stock market

Two small cap UK stocks that could explode in the long run!

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When I’m investing for growth, I don’t spend a lot of time looking at UK shares — I prefer the US and China. However, UK small-cap stocks may be more attractive to growth-focused investors. The caveat is that they can fall in value as quickly as they rise.

So here are two small cap UK stocks. They both sit just outside of penny stock territory—for different reasons—and both could benefit from long-term trends related to premiumization and sustainable consumption trends.

mulberry

mulberry (LSE:MUL) stock has underperformed over the past 12 months. The luxury goods brand has reported a 4% decline in revenue for 2023 as demand for high-end products declines.

In the last quarter of 2023, revenues fell by 8.4 percent compared to last year. With earnings sliding into the red, the share price plunged, down 55% over 12 months. The stock currently has a market cap of £63m and is trading outside penny stock territory at 110p.

Thankfully, Mulberry isn’t a leader in the luxury goods sector. LVMH, keyring, And Burberry are among the big names that alerted us to the declining demand in the sector. China is a notable contributor to this declining demand.

However, in the long term, I would expect Mulberry to benefit from positive trends in sustainable fashion and a movement towards premium shopping trends. High-end fashion stocks trade at high multiples due to premiumization trends and strong margins.

But Mulberry is currently in the red, and it’s trading at around 18 times earnings from 2022. So it’s hard to say that the company looks particularly cheap.

Mulberry desperately needs a change of fortune. This is certainly possible, given the company’s reasonable investment in new stores in Australia and Sweden, as well as ongoing investment in technology aimed at supporting future growth.

But I’m not investing in Mulberry until I see more signs of change. However, in the long run, I would be surprised to see this stock explode.

Chapel Down

English wine is trending. It’s unique, it’s award-winning, and while the output is only a fraction of that of Italy, France and Australia, investment in new acreage over the past five years has increased volumes.

Chapel Down‘s (LSE:CDGP) is at the forefront of the British wine industry, producing around 30% of total volume. Located on Kent’s chalky terroir, Chapel Down produces high-quality, award-winning wines as well as some of England’s most reasonably priced bottles. Its volume, range and quality have allowed it to become the country’s leader in terms of market penetration and brand awareness.

The company is already benefiting from premiumization trends. Young consumers are particularly keen to try new and more premium wines. Anecdotal evidence suggests that this trend began during pandemics when people had little money to spend.

However, those who bought more premium wine did not return to buying cheaper as they did before the pandemic. Likewise, Gen Z is drinking less — a concern — but targeting better quality products.

It is currently a bit expensive, trading at around 70 times earnings. But it is on a strong growth trajectory, with double-digit sales growth expected in 2024. He also has assets worth £34.3m, including wine stock worth £22.6m.


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