When Mr Market’s mood sours, it’s no surprise that small-cap stocks are usually the hardest hit. Indeed, the near-8% dip in the FTSE 100 so far in October (before this morning) pales in comparison to the near-13% spanking received by the junior Alternative Investment Market where most minnows reside.
At times like these, it’s worth remembering that severely punished stocks can be the ones to stage the biggest comebacks when markets regain their composure.
Here are three quality businesses I’m considering buying if sentiment continues to weaken.
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Losing its fizz
Thanks to the consistently high returns on capital it invests (ROCE) and a penchant for hiking dividends by double-digits, I’m a big fan of soft drinks maker Nichols (LSE: NICL). The only problem is that the stock has usually been expensive to buy.
Following the recent market sell-off, however, the owner of the much-loved Vimto brand has seen its share price fall 13% in October alone. It’s now down 37% since peaking in value in April 2017.
Despite its small size when compared to industry peers like AG Barr and Britvic, Nichols is very much a global company with a presence in 85 countries. It won’t shoot the lights out in terms of revenue and profit growth, but this is compensated for by the stability offered by its portfolio of ‘sticky’ brands that consumers find hard to move away from.
Trading on 18 times earnings for the current financial year, Nichols is still far from being screamingly cheap but most quality stocks rarely get to bargain bin levels. Should it continue falling, I’ll be all of out excuses not to buy.
Assets up
I became bullish on £107m cap investment manager Miton Group (LSE: MGR) this time last year. Unfortunately, I neglected to purchase its stock. By the beginning of October, the shares had almost doubled in value and now change hands on 15 times earnings.
When you take into account recent results, this shouldn’t come as a surprise. At the close of play on 30 September, Miton had a little under £4.87bn in assets under management, representing a rise of 38% on that held at the same time in 2017. Total net inflows soared almost 200% in the first nine months of 2018 to £927m. Given that index funds continue to gain support at the expense of active funds, that’s really rather impressive.
With many investment managers seeing their shares hit, I’m prepared to continue sitting on my hands for a while longer in order to see whether ongoing weakness provides a cheaper entry point.
Going cheap
My final pick is both the smallest company and biggest faller in recent months.
Since reaching a high of 86p in July, shares in £62m cap freight manager Xpediator (LSE: XPD) have almost halved in value. I’m struggling to identify any specific reason for this. Perhaps early holders are merely banking some profit on the back of general market jitters.
Boosted by acquisitions, Xpediator’s revenue jumped 60.7% in the first half of 2018 with adjusted operating profit 44.2% higher at £2.1m. Margins are low, but it’s worth highlighting that, like Nichols, the Braintree-based firm generates very decent returns on the money it invests.
Xpediator’s stock now trades at a little over 10 times forecast earnings for the current year. There’s a 3.4% yield on offer at the current price, a fair return while owners await a recovery.
