Every month, we ask our freelance writers to share their top ideas for small-cap stocks to buy with investors — here’s what they said for February!
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Concurrent Technologies
What it does: Concurrent designs, builds, and supplies central processing unit boards, computer inter-connections, and computer systems to a variety of industries, mainly telecoms, aerospace, and defence.
By John Choong. On the back of a terrible year for chip manufacturers, Concurrent Technologies (LSE:CNC) shares could be about to ride the rebound with the rest of the industry. Its bigger peers like TSMC and AMD have signalled a bottom in the decline of chip demand, with growth expected from H2 onwards.
Concurrent’s latest trading update pretty much supports this sentiment. Management reported a record order book worth more than £31m. As such, the board is expecting to see significant revenue growth this year as it plans to increase its production capacity, and get its free cash flow back to positive levels.
Although its current and near-term forward multiples don’t exactly scream a bargain, it’s worth noting that those metrics only have a one-year time horizon. But because I plan to invest over a longer period, I’m looking beyond that. And given its earnings potential, buying the small-cap stock now could present quite a decent upside.
John Choong has no position in any of the shares mentioned.
EKF Diagnostics
What it does: EKF Diagnostics is a leading global medical manufacturer that specialises in point-of-care testing equipment and central laboratory devices.
By Edward Sheldon, CFA. There are a few reasons I’ve chosen EKF Diagnostics (LSE: EKF) here.
One is that the company is expected to generate solid revenue and profit growth this year. For 2023, City analysts expect revenues to climb 8% year on year and net profit to rise nearly 60% year on year.
Another reason is that the healthcare diagnostics industry is relatively recession-proof. EKF’s products are used in hospital and research laboratories, doctor’s offices, and blood banks in more than 100 countries. I’d expect demand for its products to remain stable if economic conditions deteriorate from here.
Of course, as a small-cap stock, EKF Diagnostics could be a volatile investment. I’d expect its share price to fluctuate a fair bit. However, with the stock currently trading well below its all-time highs, I like the risk/reward proposition on offer.
Edward Sheldon has no position in EKF Diagnostics
Everyman Media Group
What it does: Everyman is the owner of the eponymous UK cinema chain.
By G A Chester. The share price of Everyman Media Group (LSE: EMAN) is some 35% lower than this time last year. And its market value has halved from its level before the pandemic.
Yet the company has just reported 2022 revenue over 20% higher than in the pre-pandemic year. Plus EBITDA (earnings before interest, tax, depreciation and amortisation) ahead of market expectations — a recovery taking it back to near its pre-pandemic level.
This premium cinemas chain ended 2022 with 38 venues. Management told us its “cognisant of the difficult macroeconomic environment and consumer backdrop,” but said performance in the new financial year has been encouraging. And with plans to open a further five venues in 2023, and both the volume and quality of new film releases expected to increase this year, the directors said they “continue to have significant confidence in the future.” A risk here is if this confidence turns out to be over-optimistic, of course.
G A Chester does not own shares in Everyman Media Group.
Fonix Mobile
What it does: Fonix is a unique consumer-friendly mobile payments business targetting the media, gaming, ticketing, and transport sectors.
By Zaven Boyrazian. As we move toward a cashless society, digital payment companies like Fonix Mobile (LSE:FNX) are riding on impressive tailwinds. The business provides a relatively unique mobile payment solution whereby small transactions can be completed, and the cost added to a user’s mobile phone bill. And it’s proving to be exceptionally popular.
Over 18 million people in the UK actively use Fonix’s payment solution, translating into a five-year average revenue growth rate of 25%, with operating margins steadily expanding.
Worryingly, the small-cap stock’s top 10 merchants are responsible for 85% of Fonix’s gross profits. Needless to say, that’s a fairly large client concentration risk.
But given that the firm hasn’t lost a single merchant from its platform in the last five years, these relationships seem pretty sticky. And given the potentially explosive long-term gains, opening a small position in my portfolio could prove highly lucrative in the long run despite the high risk.
Zaven Boyrazian does not own shares in Fonix Mobile.
hVIVO
What it does: hVIVO is a contract research organisation (CRO) that tests vaccines using human challenge clinical trials.
By Ben McPoland. The Covid pandemic has ushered in a wave of research and development spending focused on infectious and respiratory diseases. One company benefiting from this is hVIVO (LSE: HVO), a world leader in designing and running human challenge clinical trials.
Indeed, the firm conducted the world’s first such trial for the coronavirus back in 2021. These studies involve exposing healthy volunteers to the actual pathogen a vaccine is being tested for by biopharmaceutical companies. Its clients include four of the top 10 global biopharmas.
Management expects record revenue of £50.6m for 2022, representing 30% growth year on year. That’s with minimum EBITDA margins of 17%. Its order book is bulging, up 65% year on year with contracted revenue reaching £76m by the end of December.
Yet the small-cap stock is down 55% since reaching 38p back in April 2021. With a market cap of £113m or so, investors can expect share price volatility.
Ben McPoland owns shares in hVIVO.
Income and Growth VCT
What it does: Income and Growth is a venture capital trust that invests in a range of early stage companies.
By Christopher Ruane. Over the past year, shares in Income and Growth (LSE: VCT) have fallen 17%. I think that makes now an attractive moment for a long-term investor like me to buy the shares, which I would do if I had spare cash to invest.
The trust aims to pay an annual dividend of at least 6p per share. Although dividends are never guaranteed, last year it exceeded the target with an 8p per share payout. That means the shares currently yield over 10%. I find that very attractive, while recognising that the dividend may jump around quite a bit from year to year.
Investing in growing companies at an early stage has helped it fund lucrative shareholder distributions. If the trust’s holdings suffer in the recession, that might hurt earnings. But over the long term, I think exposure to growth stories could help the trust profit – and hopefully pay large dividends.
Christopher Ruane does not own shares in Income & Growth.
Keystone Law Group
What it does: Keystone is a full-service law firm with 400+ lawyers that embraces technology and modern working practices.
By Charlie Carman. Keystone Law Group (LSE:KEYS) is an AIM-listed company, whereas the vast majority of law firms are limited liability partnerships. Accordingly, Keystone offers a rare opportunity for investors to gain legal industry exposure in their portfolios.
The half-year 2023 interim results make for positive reading. The firm delivered revenue of £36.8m, which represents a 9.3% increase over H1 2022.
In addition, operating cash conversion of 101% and the absence of debt bodes well for the dividend. The last interim dividend was 5.2p per share.
The firm also continues to attract talent as experienced lawyers increasingly look for flexible career opportunities beyond the traditional law firm model.
Granted, there’s a risk client legal expenditure could come under pressure in an economic downturn. Nonetheless, Keystone shares have halved in value over the past 12 months, and I’d like to enter a position while I can still buy the shares in this small-cap stock at a bargain price.
Charlie Carman does not own shares in Keystone Law Group.
Ramsdens Holdings
What it does: Middlesbrough-based Ramsdens Holdings is a diversified financial services provider and retailer.
By Paul Summers. In contrast to most UK stocks, Ramsdens Holdings (LSE: RFX) enjoyed a very good 2022. As I type, the share price is up 25% over the last 12 months. There might be more gains ahead.
Recent trading has been encouraging. Jewellery retail gross profit rose 15% in the three months to December. The pawnbroking book also saw further growth. That’s not surprising in the current climate.
There’s a dividend stream from this small-cap stock, too. Right now, Ramsdens is down to yield 4.4%. This payout is also likely to be easily covered by profit. So, there’s a high probability of it being paid.
That said, no investment is a sure thing. Any chinks of light in the economy could see existing holders take profit and move on.
Then again, the valuation of 10 times earnings isn’t exactly excessive. So, as a possible hedge against further economic pain, I reckon Ramsdens remains a tempting option.
Paul Summers has no position in Ramsdens Holdings.
UP Global Sourcing Holdings
What it does: UP develops and sells branded kitchen and laundry products. Its brands include household names such as Salter, Beldray and Russell Hobbs.
By Harshil Patel. UP Global Sourcing Holdings (LSE:UPGS) sells its homeware products via supermarkets, discount retailers and online. Its business is growing. Led by a competent management team, it has managed to grow profits steadily over several years.
Looking forward, future growth is likely to come from overseas. International sales grew faster than UK sales last year. And there is potential to expand across Europe.
Most of its sales come from a handful of its brands. As such, UP is likely to keep its focus on them. That should bring additional benefits by building scale and keeping development costs low.
Bear in mind that it is currently reliant on its operations in China, and any post-Covid disruption could be an area to watch.
That said, if I had some spare cash, I’d certainly buy this small-cap stock. It’s a profitable business with a resilient balance sheet. With a price to earnings ratio of just 10, and a dividend yield of 5%, the shares look cheap to me.
Harshil Patel does not own shares in UP Global Sourcing Holdings.
