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Every month, we ask our freelance writers to share their best ideas about small-cap stocks that investors can buy – here’s what they said in February!
[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]
Technology together
What we do: Design, build, and supply central processing unit boards, interconnects, and computer systems together for various industries, especially telecommunications, aerospace, and defense.
By John Choong. At the end of a terrible year for chip makers, Technology together Shares (LSE:CNC) are likely to rise again with the rest of the industry. Greater is not equal TSMC and AMD has a lower signal in the decline of chip demand, with the expected growth of H2 continues.
Concurrent’s latest trading update supports this sentiment. Management reported a record order book worth more than £31m. Meanwhile, the board hopes to see significant revenue growth this year plans to increase production capacity, and get free cash flow back to a positive level.
Although current and short-term forward multiples don’t exactly scream bargains, it’s worth noting that these metrics only have a one-year timeframe. But since I plan to invest in the longer term, I am looking beyond. And given the potential for earnings, buying small-cap stocks now can offer great value.
John Choong has no position in any of the stocks mentioned.
Diagnosis of ECF
What we do: EKF Diagnostics is a global medical manufacturer specializing in point-of-care testing equipment and central laboratory equipment.
By Edward Sheldon, CFA. There are several reasons for my choice Diagnosis of ECF (LSE: EKF) here.
One is that the company is expected to generate revenue and profit growth this year. By 2023, city analysts expect revenue to grow 8% annually and net profit to grow nearly 60% annually.
Another reason is that the health diagnostics industry is relatively recession-proof. EKF products are used in hospitals and research laboratories, doctors’ offices, and blood banks in more than 100 countries. I expect demand for their products to remain stable if the economy takes a turn for the worse from here.
Of course, as a small-cap stock, EKF Diagnostics can be a volatile investment. I expect the stock price to fluctuate. However, with the stock currently trading below its all-time high, I like the risk/reward proposition it offers.
Edward Sheldon has no position at EKF Diagnostics
What it does: Everyman is the owner of the eponymous British cinema chain.
By GA Chester. The price of this stock is from Everyman Media Group (LSE: EMAN) is about 35% lower than last year. And the market value has already halved its pre-pandemic level.
But the company only reported 2022 revenue more than 20% higher than the year before the pandemic. Plus EBITDA (earnings before interest, taxes, depreciation and amortization) ahead of market expectations – recovery back to pre-pandemic levels.
This premium cinema chain will be completed in 2022 with 38 venues. Management told us its “understanding the difficult macroeconomic environment and consumer background,” but said the performance in the new financial year has been encouraging. And with plans to open five more venues by 2023, and the volume and quality of new film releases expected to increase this year, directors say “continues to have significant confidence in the future.” The risk here is that this belief becomes more optimistic, of course.
GA Chester has no shares in Everyman Media Group.
Phoenix Mobile
What we do: Fonix is a unique consumer-friendly mobile payments business targeting the media, gaming, ticketing, and transportation sectors.
By Zaven Boyrazian. As we move to a cashless society, digital payment companies are happy Phoenix Mobile (LSE:FNX) is riding on an impressive tailwind. The business provides a relatively unique mobile payment solution so that small transactions can be completed, and the cost is added to the user’s mobile phone bill. And it proved to be very popular.
Over 18 million people in the UK actively use the Fonix payment solution, translating into an average five-year revenue growth rate of 25%, with operating margins constantly expanding.
Worryingly, the 10 largest traders of small stocks are responsible for 85% of Fonix’s gross profit. Needless to say, this is a considerable risk of client concentration.
But since the company hasn’t lost a single trader from the platform in the past five years, the relationship seems very strained. And given the explosive long-term profits, opening a small position in my portfolio can prove very profitable in the long run despite the high risk.
Zaven Boyrazian has no shares in Fonix Mobile.
hVIVO
What we do: hVIVO is a contract research organization (CRO) that tests vaccines using human challenge clinical trials.
By Ben McPoland. The Covid pandemic has led to a wave of research and development focused on infectious and respiratory diseases. One of the companies that benefit from this is hVIVO (LSE: HVO), a world leader in the design and execution of human challenge clinical trials.
Indeed, the firm is conducting the world’s first coronavirus trial in 2021. The study involves exposing healthy volunteers to real pathogens that biopharmaceutical companies are testing for vaccines. Its clients include four of the top 10 global biopharmas.
Management expects record revenue of £50.6m for 2022, which represents 30% year-on-year growth. That’s with a minimum EBITDA margin of 17%. The order book is bulging, up 65% year-on-year with contract revenue reaching £76m at the end of December.
But the small stock is down 55% since hitting 38p back in April 2021. With a market cap of £113m or more, investors can expect share price volatility.
Ben McPoland owns shares in hVIVO.
VCT Revenue and Growth
What we do: Income and Growth is a venture capital trust that invests in a number of early stage companies.
By Christopher Ruane. In the past year, Shares Revenue and Growth (LSE: VCT) has fallen 17%. I think that makes now an attractive time for long-term investors like me to buy shares, which I would do if I had spare cash to invest.
Total dividends per year from shares of PT. Although the dividend is not guaranteed, last year it exceeded its target by paying 8p per share. That means the stock is currently yielding more than 10%. I find that very attractive, when you realize that dividends can jump around quite a bit from year to year.
Investing in early-stage growth companies has helped fund profitable shareholder distributions. If the trust’s holdings suffer a recession, it may hurt their income. But in the long run, I think the growth story can help the trust’s profits – and hopefully pay big dividends.
Christopher Ruane has no shares in Income & Growth.
Keystone Law Group
What we do: Keystone is a full-service law firm with more than 400 attorneys who embrace technology and modern work practices.
By Charlie Carman. Keystone Law Group (LSE:KEYS) is an AIM-listed company, while the majority of law firms are limited liability partnerships. Therefore, Keystone offers a rare opportunity for investors to gain exposure to the legal industry in their portfolio.
The 2023 half-year interim results make for positive reading. The company made a profit of £36.8m, which represents an increase of 9.3% during H1 2022.
In addition, the operating cash conversion of 101% and no debt bodes also for dividends. The most recent dividend yield of 5.2P per share.
The firm also continues to attract talent as experienced lawyers increasingly seek flexible career opportunities beyond the traditional law firm model.
Of course, there is a risk that the client’s legal fees may come under pressure in an economic downturn. However, Keystone shares have halved in value over the past 12 months, and I wanted to get into a position while I could still buy shares in this small stock at a bargain price.
Charlie Carman owns no stock in Keystone Law Group.
Ramsdens Holdings earnings
What we do: Middlesbrough-based Ramsdens Holdings is a diversified financial services provider and retailer.
By Paul Summers. Unlike most British stocks, Ramsdens Holdings earnings (LSE: RFX) is looking forward to 2022. As I type, the share price is up 25% over the last 12 months. There may be more benefits ahead.
Recent trade has been encouraging. Jewelery retail gross profit rose 15% in the three months to December. The pawn book also appears to be larger. Which is not surprising in today’s climate.
There is a dividend stream from this small stock as well. Currently, Ramsdens is down to yield 4.4%. This payout is also likely to be easily covered by profit. So, there is a possibility that it is paid.
That said, no investment is sure. Any light in the economy can see those who are profitable and moving forward.
Then again, a valuation of 10 times earnings isn’t very accurate. So, as a hedge against more economic pain, I think Ramsdens remains a tempting option.
Paul Summers has no position in Ramsdens Holdings.
UP Global Sourcing Holdings
What we do: UP develops and sells branded kitchen and laundry products. These brands include household names such as Salter, Beldray and Russell Hobbs.
By Harshil Patel. UP Global Sourcing Holdings (LSE:UPGS) sells homeware products through supermarkets, discount retailers and online. His efforts increased. Led by a competent management team, it has been able to generate stable profits over the years.
Going forward, future growth will come from overseas. International sales grew faster than UK sales last year. And there is potential to expand throughout Europe.
Most of the sales are from several brands. So, UP tends to stay focused on him. That should bring additional benefits by building scale and keeping development costs low.
Note that it is currently dependent on operations in China, and the post-Covid disruption could be an area to watch.
He said, if I had the money, I would definitely buy this little stock. It is a profitable business with a strong balance sheet. With a price to earnings ratio of just 10, and a dividend yield of 5%, the stock looks cheap to me.
Harshil Patel has no shares in UP Global Sourcing Holdings.
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