Many DIY investors are wary of small-cap stocks, and rightly so. Companies lower down the pecking order in terms of market capitalisation do generally carry a higher degree of risk, but they can also offer the potential for huge returns. So with hundreds, if not thousands of small-caps out there, why not be choosy? Today I’ve found two London-listed small-caps worthy of further consideration.
Top 100 global brands
First up is language translation software specialist SDL (LSE: SDL). The Maidenhead-based group is a global innovator in language translation technology, services and content management, working with no fewer than 78 out of the top 100 global brands.
The firm’s shares came under pressure in the summer, after half-year results revealed that higher costs of delivering new initiatives and planned investment resulted in lower profitability compared to the first half of 2016. The share price fell off a cliff, sinking 23% on the day the results were announced.
Short-term issues
Management has already begun implementing plans to remedy what I see as short-term issues, with many of the actions already under way. And there has already been a turnaround of sorts, with the shares climbing 25% from lows of 448.5p at the start of September, driven at least in part by more positive recent news flow.
This includes the announcement that leading airlines from across Europe, Asia and the US have signed agreements for a variety of content management products and translation services from SDL. The business already works with many of the world’s leading airline brands, including six of the top 10 global names, and more than 40 top travel companies.
For me, SDL looks like a good long-term recovery play trading on a forward earnings multiple of 26. This may seem expensive but it drops to 20 for 2018, much lower than many of its high-flying peers.
Plenty of headroom
Meanwhile, another small-cap sensation that I’d like to bring to your immediate attention is Mears Group (LSE: MER), provider of support services to the UK’s Social Housing and Care sectors. In partnership with its housing clients, the Gloucester-based group provides services in every region of the UK, maintaining, repairing and upgrading the homes of hundreds of thousands of people in all types of communities, ranging from remote rural villages to large inner city estates.
In addition, the group’s Care division provides support to over 15,000 people a year, enabling older and disabled people to continue living in their own homes. The majority of housing revenues still come from traditional contracting partnerships, where Mears is the market leader. But this only accounts for 15% of the UK’s social housing market, meaning there’s still plenty of room for further growth.
And with that growth potential in mind, I think the shares are worth buying at the present time, trading on a modest price-to-earnings ratio of 14, which drops down to 12 for 2018.
