Why I think this top small-cap stock could make you a fortune

If you’re looking for a company that could produce triple-digit returns then I’d check out this little known small-cap.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Markets are very volatile so it’s a good time to take a long term view of the stock market. One stock that I think has a very bright future is Bioventix (LSE:BVXP). It manufactures antibodies that are used to measure hormone levels in blood to detect underlying health problems. These are used by equipment providers such as Siemens in hospitals and they pay for the product as well as giving royalties of around 2% of the cost of the test when the antibodies are used. The main activity of the company is to develop and supply these antibodies.

Small team, big profits

It’s a very small but very profitable operation founded by Cambridge science graduate Peter Harrison. Since the company was AIM listed in 2014 the share price has risen a whopping 450% as profits have risen from £1.8m to £5.6m. The interesting thing with Bioventix is that it has barely expanded in this time. Most of the increase in profits has come from royalty payments for products that it developed years ago. The same effect should be seen with products that it is working on now that are unlikely to have a positive impact on revenues for at least five years due to the extensive testing required.

As a result of this very small operation (15 employees) and high profits from royalty payments, the company has a staggering operating margin of 78%. The long period of legacy payments also means that products that are developed should generate huge returns in the future, but over a long period of time. This has resulted in an industry-leading return on capital employed (ROCE) of 62%. This measure of quality is highly regarded by Nick Train, one of Britain’s most respected investors, as I explained here. In my earlier article I talked about the significance of ROCE, and why it is so important for revenue growth. And more good news for Bioventix is that every new product that it releases improves this return.

Good income and growth

The high operating margin generates the company a lot of cash and with little need to expand operations, it pays a dividend of 2.5%, which is increasing. However the company only aims to keep around £5m in cash and will pay a special dividend if it has extra lying around. This brings this year’s dividend up to around 4%.

The downside for this stock is that a company of this quality doesn’t come cheap. It has fared well during the recent sell-off following decent results in October which have supported the share price. It currently trades on a price-to-earnings ratio (P/E) of 27 which seems fair to me, but does leave buyers with a degree of valuation risk. However in present market conditions I think there is reasonable downside risk with virtually all companies regardless of performance. For me then, this is an ideal buy-and-hold investment. I would put the ups and downs to one side and watch this company increase its returns.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Robert Faulkner 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.

More on Investing Articles

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »