In 2024, I’m expecting to see some big gains from smaller value shares. In this area of the market, I think there are stocks that could deliver returns of 50%, 100%, or even more.
Here, I’ll explain why I’m bullish on the asset class. I’ll also highlight three stocks that I like the look of as we start 2024.
Small-cap shares are cheap
Right now, small-cap on the UK market shares look really cheap.
According to investment manager Montanaro, valuations across the space recently hit levels near those seen during the Global Financial Crisis of 2008/09, which marked the start of a big bull market.
According to Montanaro, when valuations have previously reached these levels, returns have been explosive (gains over the next five years have been between 100% and 150%).
Of course, there would need to be a catalyst for these shares to pop in 2024.
But I see one. And that’s lower interest rates.
Smaller companies tend to be very sensitive to interest rates. That’s because they’re often dependent on debt for growth.
If we were to see interest rate cuts in 2024, I think there’s a good chance small-caps will fly.
Three stocks to look at
As for stocks I’m bullish on, the first one I want to highlight is Keller Group. It’s a leading ground engineering company.
Keller specialises in providing advanced foundation solutions for complex projects and generates a lot of its revenue in North America. So, I think it’s well placed to benefit from the huge amount of infrastructure spending that’s set to be unleashed in the US this year.
As for its valuation, it’s cheap. Currently, the earnings per share (EPS) forecast for 2024 is 135p. That equates to a price-to-earnings (P/E) ratio of just 6.3 (less than half the UK average). A yield of around 4.9% adds weight to the investment case.
Another small-cap value play that’s worth highlighting is Renold. It’s an international supplier of industrial chains and related power transmission products.
Renold recently produced a record set of interim results. For the six-month period ended 30 September, revenue was up 8% year on year while adjusted EPS increased 41%.
This momentum isn’t reflected in the valuation though. Currently, the stock has a forward-looking P/E ratio of just 5.6. I see potential for substantial gains at that valuation.
Finally, I’d take a look at Costain Group. It’s a key sustainable infrastructure solutions company.
This is another company with plenty of momentum. Earlier this month, it announced new contracts worth up to £670m.
Right now, however, the stock is trading on a P/E ratio of just 6.2.
Now, it’s worth pointing out that small-cap shares are higher-risk investments. Generally speaking, they’re much more volatile than blue-chip stocks.
Therefore I think it’s crucial to ‘right-size’ positions (that is, keep them relatively small) when investing in these types of shares. That way, any losses won’t blow up a portfolio.
