These are companies that provide goods or services which are demanding, regardless of economic conditions. One example might be Retail Food Group Ltd [ASX:RFG].
The company owns various franchises, such as: Crust Pizza, Donut King, Brumby’s Bakery and many others. Who says ‘we can’t afford pizza tonight, the economy is tough’?
Yet despite what would seem like a recession proof stock, RFG was one of the worst performers in 2017.
The stock dropped well over 50%. And their start in 2018 hasn’t been much better.
Another Profit Downgrade
This morning, RFG announced a new Master Franchise Agreement for their UK licences. Due to variation in the licences, RFG said profits for the first half of FY18 will be less than the $22 million they previously stated.
The stock dropped more than 8% this morning to $2.25 per share, but has since recovered to $2.36.
Source: Google Finance
Is it worth buying RFG now? The stock has dropped significantly. Maybe it’s time to swoop in and buy this bargain?
It really all depends on what you think earnings will do in the future. Yes, the stock has declined significantly. But that’s because earnings have taken a blow.
If we imagine RFG can generate $40 million in profits for FY18, then the stock currently trades at a little over 10-times earnings.
Is RFG worth 10-times earnings? Maybe. The group has manageable debt levels. They produce around $55–60 million in cash from operations, of which around half goes towards maintaining their physical assets.
It definitely won’t be a riskless investment. But one that might pay off over time.
Junior Analyst, Money Morning
PS: Like in 2017, the highest returns for 2018 will likely be found in the smaller end of town. To help you get started on your hunt for 100% returns, check out these three small-cap stocks trading on the ASX.
All three have huge potential to rocket up in a matter of months.