The shares soar, then slump

It’s been tough recently for owners of the shares. The legal services group floated in London on 29 June 2018. After their first day of dealing, the group’s shares closed at 175p.

Over the next two years or so, Knights Group stock went on a tear, reaching an all-time intra-day high of 500p on 3, 7 and 8 September 2020. However, the shares then started to slide, ending 2020 at 393.5p and closing out 2021 at 410p.

Alas, 2022 has been really brutal for this stock. On 21 March, the shares closed at 365p, but more than halved the next day. Following a profit warning issued on 22 March, the shares crashed 50.7% to close at just 180p. This meltdown continued into the summer, with the stock plunging to a record intra-day low of 83.8p on 1 July.

This small-cap stock has surged this month

On 11 July, Knights Group shares closed at 95p, 11.2p above their all-time low. But on Tuesday (12 July), the group released its full-year results. This lit a fire under the stock, which leapt to close at 116p. The stock then closed at 127p on 13 July. That’s a hefty gain of more than a third (33.7%) in two days.

On Friday, this stock closed at 125.5p, valuing the company at £107.7m. So KGH shares shot up by 28.1% last week — some relief for its suffering shareholders. Yet they remain 71.8% down over 12 months. Ouch.

In-line results sparked a relief rally

One reason why Knights Group shares leapt last week was an old-fashioned relief rally. In its full-year results, the firm unveiled revenues up 22% to £125.6m, in line with the forecast in its spring update. Underlying profit slipped by 2% to £18.1m, but pre-tax profit crashed by 80% to £1.1m, after subtracting acquisition costs of £13.2m.

The group blamed a tough fourth quarter on “unusually high levels of employee sickness and disruption” caused by Covid-19 variants. However, in one bit of good news for shareholders, the company announced a final dividend of 2.04p, boosting the full-year dividend to 3.5p.

How do the shares stack up today?

Knights Group is very much a growth stock, as the company’s expansion strategy involves aggressively buying up regional law practices. As a result, the group’s balance sheet includes over £33m of debt and nearly £47m of lease liabilities. That’s lot of borrowing for a small-cap company. However, analysts expect profits to recover in 2022-23, meaning the shares trade on a forward earnings multiple of around five. The dividend yield of 2.8% a year is a bonus, but payouts could be cut if earnings prove volatile.

As a value investor, Knights Group shares are not my cup of tea. Hence, I’ll leave them on the shelf!

Watch this space

Recent news coming out of Watches of Switzerland Group (LSE: WOSG) has been pretty spectacular. It leads me to believe the luxury retailer could be a sage buy before full-year financials on Thursday, 8 July.

The introduction of Covid-19 lockdowns and the subsequent closure of its shops couldn’t stop revenues rising in the last financial year. In fact, at £905.1m, sales in the 12 months to April 2021 jumped 13% to the top of end of expectations. Furthermore, income soared 82% in the final three months of the fiscal year as its stores reopened.

It’s said that buyers of big-ticket items prefer to see their purchases in the flesh before flashing the plastic. But the terrific performance of Watches of Switzerland runs counter to this idea. Online sales rocketed 121% year-on-year in financial 2021. And they soared 218% during the final three months of the period too.

Now, Watches of Switzerland shares don’t come cheap. This UK retail share trades on an enormous forward price-to-earnings (P/E) ratio of 34 times. It’s the sort of elevated valuation that could lead to a significant share price drop  if demand for its Rolexes, Omegas and other luxury timepieces begins to wane. I still think the business is a great buy, however, given the excellent progress it is making in the fast-growing e-commerce space, as well as in the US.

Another top UK share to buy

I’m also tempted to invest in Knights Group (LSE: KGH) before full-year results are unfurled on Wednesday, 14 July. Last time the legal services provider updated the market, it predicted that revenues for the 12 months to April would beat forecasts thanks to “good organic growth” in the second half.

Knights Group is a UK share with the bit between its teeth and its core business is firing on all cylinders. Though I wouldn’t just buy the company in anticipation of a sunny follow-up to May’s most recent release. The legal giant remains extremely active on the acquisitions trail to deliver supreme long-term profits growth. This month it sealed the takeover of Sheffield-based commercial lawyers Keebles. And it has its crosshairs trained on more M&A targets.

Chief executive David Beech recently commented that the business “expects to selectively execute on an attractive acquisition pipeline during the current year,” adding that the medium-to-long-term impact of Covid-19 has accentuated “the group’s acquisition opportunities in the highly fragmented market for legal services outside London.”

City analysts think annual earnings at Knights Group will rise 25% in financial 2022. This leaves the UK support share trading on a forward PEG ratio of just 0.7. It’s true that an acquisition-led growth strategy like that of Knights Group creates additional risks. Costs can unexpectedly rise and earnings contributions can disappoint from newly-purchased assets. But I still think the company is a top UK share to buy and particularly at recent prices.