Surge in performance and drop in share price

Best of the Best is an online platform that organises competitions. It offers people the opportunity to win cars, cash, and other prizes too. It was once viewed as an excellent growth stock.

During the Covid-19 pandemic, interest in competitions and gaming surged and this benefited BOTB. During lockdowns, consumers had more time and cash to spend as they were unable to go on holidays or partake in their favourite social and leisure activities.

As I write, shares in BOTB are trading for 652p per share. Approximately three weeks ago, the growth stock was trading for 1,552p per share on 12 August. That equates to a 57% drop. In May, shares reached an all-time high of 3,400p per share. So what’s happened?

From FTSE growth stock to risky proposition

On 16 June, BOTB released full-year results until April. These were extremely positive in my eyes. Revenues increased over 150% during this period compared to the year prior. Profit increased to £14.1m compared to £4.2m a year earlier. Cash on its balance sheet rose by 127% to £11.4m compared to the year before. BOTB paid a 5p per share dividend which was up from 3p the year before.

Unfortunately for BOTB, news that customer engagement and interest had waned and this trend was set to continue was a hammer blow. Its share price began to tumble.

To make matters worse, a trading update issued in August confirmed lessening customer engagement. BOTB said new customer sign up had not gone well and it was spending more on marketing to entice new customers than ever before. This saw the FTSE AIM incumbent’s share price drop further and reach current levels. 

Risk and reward

BOTB could see its share price decrease further and customer interest continue to wane. The reopening of leisure venues and the ability to book holidays once more has already begun to affect it. I fear this trend may continue.

In addition to this, I fear BOTB’s management don’t have a surefire plan or the ability to increase customer levels once more. The only assertions given were by pointing towards a “flexible business model, growth strategy and plans for the year ahead.” No further detail was provided.

There is lots to like about BOTB, however. Forecasts remain upbeat about its profits outlook with earnings rises of 17% and 16% estimated for financial years April 2022 and April 2023. Furthermore, it has no debt on its balance sheet which means it is financially sound. Finally, I do like its online-only business model and its focus on the fast-growing gaming market.

Right now, I would not be willing to buy BOTB shares. I believe the uncertainty around customer engagement levels is too big a risk. I believe there are better FTSE stocks out there for my portfolio.

Several popular shares crashed in August. I’ve been taking a fresh look at three of these companies to see if I think they offer buying opportunities.

Down 57%: this isn’t a game

Spot the ball competition operator Best of the Best (LSE: BOTB) is known for the expensive cars it offers to winners of its weekly contests. Profits tripled last year when players were stuck at home in lockdown. But August was a bad month for this company.

BOTB shares fell by more than 50% in one day after the company said that falling sales and rising costs mean that profit for the current financial year is expected to be 62% below previous broker forecasts.

Unsurprisingly, the company says that some customers are playing less now that Covid-19 restrictions have been lifted. Alongside this, advertising costs to attract new customers have risen by up to 60%. As a result, fewer new players are being signed up.

Many shareholders are also disappointed that the company directors sold £60m of stock in April, just before the problems started. Did they know already?

BOTB shares now trade on 12 times 2022 forecast earnings and the group has no debt. The shares could be cheap, but I don’t think they’ll return to their previous highs. I’m not tempted to buy just yet.

The best UK share to buy now?

FTSE 250 personal protection technology specialist Avon Protection (LSE: AVON) was also a big faller in August. The shares fell by 28% in one day and are now down by 50% over the last year.

The crash was triggered by news that the company — which makes products such as military gas masks and helmets — is suffering from delayed orders and supply problems. As a result, sales will be lower than expected this year.

This is a business I’ve previously rated highly, so I am interested. As far as I can see, Avon’s problems should be temporary. The group is continuing to win new work with key customers such as the US military and management is confident that “delayed orders will be received over the coming months”.

Avon shares now trade on around 19 times 2022 forecast earnings, with a 1.7% dividend yield. That seems about right to me — Avon previously looked very expensive, in my view. I’d like to own the shares, but I’d like to get them a bit cheaper, so I’ll hold fire for now.

Disappointing drilling data

The final stock I’m looking at is explorer Helium One Global (LSE: HE1). Shares in this small-cap fell by nearly 70% last month after the company reported disappointing drilling results from its Rukwa project in Tanzania.

Chief executive David Minchin says that the company has now ended its 2021 drilling programme and is working on plans for 2022. I think there’s still some potential here, and fortunately Helium One still has £10m of cash on hand.

However, small explorers with no revenue are always high-risk speculative investments. These early disappointments have made me even more cautious. I certainly don’t think this is one of the best shares to buy now — I think the shares could have further to fall. I’m not buying.

Best of the Best’s share price hit its cheapest since 14 January, at £17.56 earlier in midweek trading. The market has taken fright on news that customer engagement has cooled more recently.

Profits boom

Best of the Best organises competitions for people to win cars, cash and other prizes. And its revenues rocketed last year, as customer interest surged during Covid-19 lockdowns.

Revenues shot 157% higher during the 12 months to April, the AIM company said, to £45.7m. This, in turn, propelled pre-tax profit to £14.1m, from £4.2m a year earlier.

Strong revenue flows helped push cash on Best of the Best’s balance sheet to £11.4m, up 127% year-on-year. And this helped underpin a bumper year for dividends at the business.

Best of the Best paid a 5p per share dividend for financial 2021, up from 3p in the prior fiscal period. It also forked out a 50p per share special payment.

Best of the Best’s share price still slumps

Commenting on the results, chief executive William Hindmarch said that “the business continued to benefit from its transformation to a wholly online operation, combined with material increases in marketing investment and our broader product offering.”

He added: “Our digital only model gives us flexibility and focus, as well as capital efficiency and cost savings, combined with the potential to further increase online marketing investment.”

These words were of little consolation to market makers however. News that customer interest has waned more recently sent Best of the Best’s share price crashing through the floor.

Hindmarch said that “in contrast to the summer 2020 period, we have experienced somewhat of a reduction in customer engagement” since coronavirus restrictions were eased on 12 April. He also said this was related more specifically to the re-opening of the hospitality sector and non-essential retail.

The chief executive added that “we are closely monitoring this, but with our flexible model, growth strategy and plans for the year ahead, we expect customer engagement to return to normal levels before too long.”

An uncertain outlook

Current City forecasts remain upbeat about Best of the Best’s profits outlook in the short to medium term. Earnings rises of 17% and 16% are estimates for the financial years to April 2022 and April 2023 respectively.

There’s a lot that I like about Best of the Best. It has no debt on the balance sheet, which should help with plans to invest in its IT capabilities and marketing activities. I also like its online-only model and specific focus on the fast-growing mobile gaming segment.

But I’m afraid I won’t be buying this UK share due to uncertainty over what future engagement levels will look like amid unwinding coronavirus restrictions and fierce competition in the gaming segment.

Today however, the shares have crashed well over 20% in value, at the time of writing. What’s going on? 

Profits soar at this UK growth stock

It’s surely not down to the full-year numbers. Supported by multiple UK lockdowns, BOTB’s competitions clearly provided a welcome distraction to what was going on in the world. As a result, revenue jumped over 150% to £45.68m in the 12 months to the end of April. Pre-tax profit hit a staggering £14.06m. In the previous financial year, this figure was £4.19m. 

Sure, the pandemic couldn’t have been predicted. However, these figures do serve to endorse BOTB’s earlier decision to move completely online. Running competitions via apps allows the money saved from not operating in sites such as airports to be funneled into marketing and player recruitment instead. 

In addition to the above, a final dividend of 5p per share was announced by BOTB. This is a 66% hike on that returned in 2020. A lovely special dividend of 50p per share was also confirmed. 

So why has BOTB crashed?

It looks to be down to comments made by CEO William Hindmarch. In his statement, BOTB’s leader reflected that the company had seen “a reduction in customer engagement since the latest easing of lockdown restrictions on April 12, 2021, specifically relating to the understandably long-awaited re-opening of hospitality and non-essential retail.”

In other words, people are doing more of what they couldn’t and less of what they could.  

This all makes perfect sense, especially given the great weather we’ve seen in the UK recently. The question is, has BOTB’s purple patch come to an end, or is this a wonderful opportunity for me to get involved?

To buy or not to buy

Right now, I’m torn. On the one hand, there’s a lot to like about Best of the Best. The company consistently generates great returns on the money it invests and operating margins have soared in recent years. On top of this, BOTB is financially sound with zero debt. Investors also need to remember that no company’s valuation rises in a straight line, particularly one with less than half of its shares available for purchase on the market.

On the other hand, I’m not entirely convinced by management’s assumption that levels of customer engagement will “return to normal levels before too long.” No concrete reason is given for this belief, other than by appealing to the company’s “flexible business model, growth strategy and plans for the year ahead.“

The problem is that having an inherently great business counts for little if customers don’t continue using it. If the UK really does fully unlock on 19 July, one wonders whether things could get worse before they get better.

Bottom line

Based purely on BOTB’s numbers, today’s fall looks massively overdone and I suspect some sellers may end up regretting their decision in time. Then again, I also think that the murky outlook means shares will remain volatile for a while to come.

As such, this UK growth stock remains on my watchlist for now. 

Best of the Best

This time last year, shares in online competition firm Best of the Best (LSE: BOTB) were changing hands for 395p. Yesterday, the price closed at a staggering 3120p. Clearly, people have been very keen to win cars and other prizes while being forced to stay at home.

Back in February, the company revealed that strong trading had continued into the third quarter and that it remains likely to outperform management’s previous expectations. In fact, things have been going so well that BOTB has now removed its ‘for sale’ sign.  

Despite rising by so much, I think this UK share could head higher. Analysts are forecasting a 14% jump in earnings in the next financial year. This gives BOTB a price-to-earnings (P/E) ratio of 21. That still looks very reasonable when you consider the outsize returns on capital and decent operating margins it achieves.

On the flip side, one does need to consider whether trading will remain quite so stellar once lockdown restrictions are fully lifted. So, as much as I like to ‘run winners’, I’d be mightily tempted to take some money off the table if I were invested.

Rainbow Rare Earths

A second company worth highlighting is Rainbow Rare Earths (LSE: RBW). One year ago, its shares were 1.45p. Yesterday, they closed at 17.75p! 

Much of this momentum is probably due to the buzz surrounding renewable energy. Rare earth metals (such as neodymium and praseodymium) are used in magnets for electric vehicles and wind turbines. Importantly, they have no known substitute.

Rainbow looks well placed to capitalise on demand eventually outstripping supply. Its Gakara Project in Burundi gives out one of the highest-grade concentrates in the world. 

However, where the RBW share price goes in the rest of 2021 is difficult to say. Mining stocks are notoriously volatile and some profit-taking would be understandable after such a strong recovery.

Then again, I also wouldn’t be surprised if many investors elected to stay put. With countries looking to secure their supply chains (China already controls 80% of the rare earth market), there could still be quite a bit of upside ahead.

Naked Wines

A final UK share that’s done extremely well for holders is online wine seller Naked Wines (LSE: WINE). Sure, the share price hasn’t performed quite as brilliantly as BOTB or RBW but we’re still talking about a gain of 200% or so. If only I’d backed my judgement back in 2020!

As one would expect, Naked has benefited hugely from the UK lockdowns. Back in November, it revealed a near-80% rise in revenue (to £157.1m) for the six months to 28 September. Since we’ve had yet another lockdown in 2021, I believe the full-year numbers will be just as good. An update is due in a couple of weeks. 

The question, however, is whether demand is likely to moderate when we’re allowed to visit the pub again.  I suspect this might be the case. For this reason, I would probably only take a small position now.

Amongst the strongest winners were US technology companies that benefited from millions of workers shifting to work from home. One way I tend to gain exposure to these high growth technology companies is with mutual funds and investment trusts.

My best investment idea in this space is Scottish Mortgage Investment Trust (LSE:SMT). Don’t let the name fool you, it has nothing to do with mortgages. It’s mostly invested in large, global, technology companies, including Tesla, Amazonand Netflix.

So far this year, its price has gained a pleasing 55%. This comes after a 26% gain in 2019. My view is that these large technology companies have great prospects, and I’m happy to keep this investment trust on my best investment ideas list.

Best of the best investment ideas

Somewhat ironically, my best of the best investments so far in 2020 is an online competition company called Best of the Best (LSE:BOTB). Its share price is up nearly 400% this year!

Even after such a strong share price performance, I’m confident enough in its prospects to continue buying on any weakness. After a series of profit upgrades over the past year or so, Best of the Best continues to deliver increased revenues and profits, ahead of market expectations.

This niche company was founded over 20 years ago, and built up its brand in UK airports with “spot the ball” competitions for prizes, including high-value cars. In recent years, it has gradually been moving the business online.

The initiatives taken to re-orientate its marketing strategy toward an online-only model seem to be proving successful. I’d say that BOTB has great quality metrics with earnings growth in triple digits, an undemanding valuation and no debt. Therefore, I am happy to keep it on my best investment ideas list for 2020.

Size matters

I believe the best investment ideas are often found in under-researched smaller companies. I reckon small and mid-sized companies have more potential to become the giants of the future. As the investment veteran Jim Slater once said, “elephants don’t gallop”.

Another small company that forms one of my best investment ideas this year is Codemasters (LSE:CDM). The UK gaming sector is thriving, and this year’s Covid-19 lockdown has provided a further boost to game playing. The Codemasters share price is now up 40% this year.

The board recently announced that earnings will be significantly ahead of current market expectations, driven by a particularly strong performance of its Formula One title, F1^® 2020 and continued strength of the company’s back catalogue.

With earnings growth, return on capital, and profit margin all in double-digits, I reckon Codemasters will stay on my best investment ideas list this year.

So, what is this company, and can it still make you money? Read on for my take.

What does Best of the Best do?

Best of the Best has been around since 1999. Up until recently, it was best-known for running competitions in shopping centres and airports. Those buying a ticket stood a chance of winning the rather nice car on display.

These days, however, everything the company does is online. This is understandable when you consider just how many more competitions it can run (and people it can target) via this medium.

Its new business model also means the AIM-listed company is no longer burdened with a high-cost retail estate and can funnel what it saves into things like marketing instead.

Why are the shares flying?

So why is the business continuing to perform so well?  A couple of reasons.

First, recent trading has been very encouraging. In last week’s full-year results, Best of the Best reported a 20.1% rise in revenue to £17.8m in the 12 months to the end of April. Pre-tax profit pretty much doubled to £4.2m. 

With numbers like these, it’s perhaps no surprise that the market minnow has decided to shower cash on its owners. A total dividend of 3p per share — up 50% from 2019 — is due in October. Even better, a special dividend of 20p per share is coming in July!

The second reason follows on from the first. Since releasing these numbers to the market, BOTB’s management claims to have received “very preliminary expressions of interest which could potentially lead to an offer or offers being made” for Best of the Best.

With a ‘formal sale process’ to engage with potential suitors now set up, the company could be snapped up in short order.

Can you still make money?

The huge rise seen in the share price clearly goes some way to reflecting recent trading and the potential sale. As such, gains are unlikely to be as great going forwards. 

Moreover, there can be no guarantees of an offer being submitted. And even if one is forthcoming, holders may believe it doesn’t accurately reflect the true value of the company.  

Another thing worth pointing out to potential buyers is the exceptionally low free-float. With just 17% of the company’s shares available to investors in the market, it only takes a few sell orders to send the share price tumbling. This could easily happen if enough want to bank profits, or we get another general market crash. 

That said, the outlook for this business is undeniably encouraging, even if an offer isn’t forthcoming. Recent buoyant trading has apparently continued post-period end and management expectations continue to be exceeded.

The £130m-cap also scores highly on quality metrics. Margins and returns on capital employed are high, there’s £5.21m in cash on the balance sheet, and there’s no debt. If I were going to invest now, this is what I’d be focusing on. 

Best of the Best still has the potential to make money for new investors, I feel. Just don’t rely on a takeover to be the reason.

Unfortunately the firm’s shares fell by more than 25% on Wednesday after it was forced to issue a profit warning. This setback is due to a change in the tax rules governing such competitions. It seems that new tax rules mean that Best of the Best will now have to pay Remote Gaming Duty instead of VAT.

A sizeable hit

Helpfully, management has provided detailed guidance about the likely impact of the changes.

Pre-tax profit was £1.5m for the year ending 30 April. This is expected to fall to “not less than £1.4m” during the current year as the new changes take effect part-way through the year. A drop to “not less than £1.2m” is then forecast for the 2018/19 financial year.

I estimate this could be equivalent to earnings per share of about 12.7p this year and 10.9p next year, compared to previous broker forecasts of 13.1p and 13.7p per share.

Any good news?

There was also some potential good news. Best of the Best is currently in the process of trying to claim back £4.5m of VAT. That’s equivalent to 44p per share. If the claim succeeds, I’d expect some of this cash to be returned to shareholders.

Another potential positive is that the company now plans to buy back some of its shares from the market. Over time, this should help to support earnings per share and improve the firm’s ability to pay larger dividends.

My view

The change which triggered today’s warning looks like a one-off and does not appear to be the fault of management.

Given the group’s history of growth and cash generation, I’m inclined to take a fairly positive view of the shares.

A fashionable choice

Shares of fashion retailer Joules (LSE: JOUL) have drifted lower over the last couple of months, but at 268p the shares are still worth 37% more than when the group floated in May 2016.

This week’s trading update provided a fresh view on performance in a difficult market for retailers. Unfortunately, the company’s statement did seem to be a little short on detail.

Although we learned that sales grew by 18.2% to £96.2m during the six months to 26 November, no information was provided on like-for-like sales growth from its stores. As 10 new stores were opened in the period, it would have been useful if the group had broken out like-for-like growth and internet sales from this total.

On a similar note, I wasn’t sure what to make of the group’s outlook. Chief executive Colin Porter commented that “trading conditions will remain challenging” but said that the brand had “performed well” so far this year. On balance I suspect that results are expected to be in line with expectations.

On that basis, earnings per share are expected to climb by around 20% this year and in 2018/19. This gives the stock a PEG ratio of about 1.5, falling to 1.1 next year.

In my view these figures suggest the shares may be fairly priced at current levels. I’d rate the stock as a hold.

Despite this, there could still be a number of stocks with investment potential. Many shares have high growth rates which may not yet be fully reflected in their share prices. Here are two companies which could fall into that category.

Strong results

Reporting on Thursday was competition specialist Best of the Best (LSE: BOTB). The company announced a rise in revenue of 7%, with profit before tax increasing by 42.7%. This was aided by the success of the company’s strategy, with its revenue continuing to shift towards online and away from physical sales. In fact, around 80% of sales are now generated online, which reduces the company’s risk profile since new sites are not necessarily required.

The company announced a special dividend of 6.5p per share, with a 1.4p ordinary dividend also set to be paid. This puts the company on a yield of 2%, with dividends being covered 1.7 times by profit. Therefore, there could be scope for further growth in shareholder payouts in the long run.

However, it is with regard to the company’s earnings growth potential where there may be even more appeal for investors. Best of the Best is making investments in its online marketing, while it is seeing margin growth because of improving scale and competition frequency. This is allowing it to negotiate better prices on cars purchased, which is a trend that could continue in future. Therefore, while a relatively small company which has a high risk profile, it could prove to be a sound buy.

Low valuation

Also offering strong growth potential is online bingo operator Jackpotjoy (LSE: JPJ). While its bottom line is forecast to fall by 7% this year, it is due to reverse this decline with growth of 11% next year. This has the potential to gradually improve investor sentiment in the stock as the company’s financial performance improves.

Since Jackpotjoy trades on a price-to-earnings (P/E) ratio of just 6.3, it seems to offer excellent value for money. In fact, when combined with its forecast growth rate, its rating translates into a price-to-earnings growth (PEG) ratio of only 0.6. This suggests that share price growth could lie ahead after its 6% gain of the last month.

Clearly, the online gaming sector is becoming more competitive, and sector consolidation may therefore become more likely as incumbents seek to reduce costs. Due to Jackpotjoy’s relatively low valuation and upbeat growth prospects, it could be a realistic bid target. However, even if an offer does not come to fruition, it could still prove to be a strong investment for the long term.

Discussions are also ongoing with other potential investors, as well as with LGO’s bankers, BNP Paribas. The latter is regarding a possible extension beyond the end of this month of the waiver on payments on the funds drawn down by LGO’s subsidiary.

Due to its precarious financial position, LGO has ceased all drilling activities and is attempting to conserve cash in the current low oil price environment. Looking ahead, the dual challenges of a continued low oil price as well as the challenging financial outlook which the company faces mean that LGO’s shares are incredibly risky.

Certainly, the company’s asset base is appealing and as today’s update states, the Goudron field in Trinidad continues to offer long term potential. However, with other oil and gas plays being in stronger financial positions and offering good value for money, there appear to be better risk/reward opportunities available elsewhere.

Also among the biggest movers in the oil and gas sector today is Nighthawk Energy (LSE: HAWK). Its shares have risen by 8% today despite there being no significant news flow released by the company. However, investor sentiment has been relatively buoyant in the last month owing to strength in the wider resources sector and also as a result of a positive production update from Nighthawk.

In fact, the company announced on 1 February that it expects total revenues for the full-year to be significantly higher than current market expectations. And with Nighthawk forecast to return to profitability in the 2016 financial year with a pretax profit of £6.6m, investor sentiment could continue to improve over the medium term following its share price rise of 39% in the last month. As such, it may be worth a closer look for less risk averse investors.

Meanwhile, shares in competition company Best of the Best (LSE: BOTB) (where entrants can win a supercar) continue to soar and have risen by an additional 10% today. This takes their capital gain to an incredible 250% in the last year and with a special dividend recently announced, they are due to yield over 8.5% in the current year.

The special dividend seems to have improved investor sentiment in Best of the Best yet further, with it equating to 19.5p per share, which works out as 7.6% of the current share price. It is being paid because the company feels that it has excess cash sitting on its balance sheet which will not be required for working capital purposes over the next year. And with the company being cash generative and having a relatively strong balance sheet, it appears to have a bright long term future.

With shares in Best of the Best trading on a price to earnings (P/E) ratio of 31.8, they seem to be rather expensive given that earnings growth of 13% is forecast for the current year. But further gains simply cannot be ruled out, since there is still significant online growth potential on offer.