If you’re looking for big returns from the stock market, it can pay to look outside the FTSE 100. Sure, the index has jumped 12% in the last six weeks or so, but over the long term, its performance hasn’t been breathtaking. It’s returned just 7.1% per year, on an annualised basis, for the five years to the end of April.
In contrast, plenty of high-quality small-cap stocks have generated returns considerably higher than that. Here’s a look at one such stock that’s significantly outperformed the FTSE 100 in recent years.
Affordable luxury
£441m market-cap Patisserie Holdings (LSE: CAKE) is a leading cafe and casual dining group offering cakes, pastries and meals from over 180 stores in the UK. It currently operates across five differentiated brands including Patisserie Valerie, Philpotts and Baker & Spice, essentially catering to those seeking affordable luxury.
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Listing on the AIM market just under four years ago at an IPO price of 170p, CAKE shares have since surged 155%, easily outperforming the return from the FTSE 100 of 13% (not including dividends) over that period. Revenues and profits have grown strongly in that time, and the group has begun paying its shareholders a dividend. Can the stock continue to keep smashing the returns from the large-cap index going forward?
Half-year numbers
A glance at the group’s half-year numbers released today reveals that Patisserie has solid momentum across its business right now. For the half year to 31 March, group revenue climbed 9.1% to £60.5m and diluted earnings per share increased 13.2% to 8.92p. Sales from the company’s website rose an impressive 63% to £2.6m. Net cash on the books increased to £28.8m, up from £16.2m last year and the group hiked its interim dividend by a healthy 20% to 1.44p per share.
Executive Chairman Luke Johnson was upbeat about the results, commenting: “The group has delivered a strong set of results in a sector which has well-documented challenges. Our vertically integrated and flexible business model enables us to deliver consistent profits with our affordable treats remaining popular with our very diverse customer base.” He added that the firm remains focused on organic growth and with a strong balance sheet, continues to assess acquisition opportunities which will have a strategic and cultural fit.
Compelling investment thesis
Analysing the numbers, the outlook for CAKE shares looks good, in my opinion. Revenues and profits are trending up, cash flow is strong and dividends are rising. Furthermore, with a high current ratio, a low debt-to-equity ratio, and an attractive return on equity, it also meets three key must-haves that Warren Buffett looks for in a stock when investing.
The shares currently trade on a forward P/E of 23 and while that’s not an overly cheap valuation, I think it’s a fair price to pay for a ‘slice’ of this fast-growing niche business. I believe Patisserie Holdings shares have considerable long-term potential.
