Gamble of the week: A hot, small energy company

published 21 February 2014

One of the reasons to invest in smaller firms is that you might find one where you make several times your original stake the proverbial ten-bagger.

You do this by finding a firm when it's small and young, but destined to become large and successful. Of course, most don't turn out this way, and more often than not investors are likely to make big losses rather than big profits. A lot of luck is needed.

This small-cap helps companies reduce their energy costs, a growing problem in recent years. It negotiates prices with energy suppliers and also offers services to help firms use less energy and lower their carbon footprint.

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At the moment the bulk of Utilitywise's(Aim: UTW)income comes from commission payments from energy companies.

The company is growing fast and is taking on more staff to target potential customers. It's also been buying firms to add more services and gain a bigger share of this fragmented market. Its share price has soared since it floated on the Aim market back in 2012.

Unlike many hot stocks, Utilitywise is profitable and pays a dividend. Pre-tax profits increased by 78% in 2013, with analysts expecting earnings per share (EPS) growth of 60% and 40% in 2014 and 2015 respectively.

This is based on the fact that it is growing its customer base rapidly, with the value of contracts nearly equivalent to lastyear's turnover (£23.8m) waiting in thewings.

There are somerisks though. Thecommission feestructure of so-calledthird-partyintermediariesin the energy market is unregulatedand could change. Competition mightincrease and reduce profits.

It alsoseems likely that Utilitywise will lookto buy firms to grow and might issueextra shares to do so which could riskdiluting existing shareholders' interests.

However, with a market that could growsignificantly in the years ahead, theshares look interesting despite theirstellar rise. Consensus analyst forecastsput them on 21 times 2014 earningsfalling to 15 times in 2015. If the growthcomes through, then today's share pricemay look to have been a very fortunatebuying level.

Verdict: worth a gamble

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.