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Forget the easyJet share price. I’d buy UK small-cap shares to get rich

Rupert Hargreaves
·3-min read
Aircraft wind on the sunrise sky background.
Aircraft wind on the sunrise sky background.

The easyJet (LSE: EZJ) share price has lost around two-thirds of its value this year. This decline has attracted some value-seeking investors to the stock as, compared to history, it looks cheap.

However, while shares in the low-cost airline do appear to offer value for money at first glance, the company is facing some significant headwinds. These are unlikely to dissipate anytime soon, which suggests the group and its investors are in for a rocky ride.

With that being the case, I’d avoid the easyJet share price for the time being. I think there’s more value to be found in UK small-cap shares.

easyJet share price uncertainty

The biggest challenge facing the airline group today is uncertainty. The coronavirus crisis has hammered the airline industry. Some estimates suggest the industry as a whole is on track to lose $100bn in 2020.

easyJet hasn’t been able to escape the carnage. The company forecasts its first annual loss in its 25-year history. Management has also been scrambling to raise enough cash to keep the lights on since March. Sale and leaseback agreements have helped unlock capital, while additional debt facilities have provided further liquidity.

These efforts have helped stabilise the easyJet share price, but there’s no guarantee the company will recover in 2021. It could take many years before the group sees profits return to 2019 levels. This could cause depressed investor sentiment for years, which will weigh on the stock price.

A better buy

As such, while the easyJet share price looks cheap, I’d rather buy UK small-cap shares instead. Many of these businesses offer the same sort of value from an investment proposition as the low-cost airline group. The big difference is they have better growth prospects.

Take packaging products group Macfarlane for example. Unlike easyJet, this business has managed to escape the worst of the coronavirus pandemic. It’s expected to report a small 2% decline in earnings for the year.

However, profits are projected to jump by 23% in 2021. This could support a threefold increase in the group’s dividend, according to current projections. Based on these estimates, the stock is trading at a PEG ratio of 0.6 and is set to yield 3% by 2021.

Another small-cap I’d consider over the easyJet share price is videogames developer Sumo Group. This business is expected to report earnings growth of around 20% this year, followed by gains of nearly 50% in 2021. Based on these projections, the shares are dealing at a PEG ratio of 0.9.

Unlike the larger airline group, Sumo is also cash rich. It ended its last financial year with net cash on the balance sheet of nearly £6m. As the growth continues, it seems reasonable to suggest this cash balance will continue to expand.

So, that’s why I’d considered buying UK small-cap shares over the easyJet share price. Their growth and income potential could lead to much higher total returns for shareholders in the years ahead.

The post Forget the easyJet share price. I’d buy UK small-cap shares to get rich appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020