These small caps are smashing the FTSE 100!

Frustrated by low FTSE 100 (INDEXFTSE: UKX) returns? Check out these super small-cap stocks, says Edward Sheldon.

| 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.

In my experience, many people are quite conservative when it comes to stock market investing. Often, they’ll just buy a number of FTSE 100 stocks, or invest in a FTSE 100 tracker, with the goal of generating a return of 6%–8% per year.

There’s absolutely nothing wrong with this approach, of course. However, by allocating a little bit of capital to fast-growing smaller companies, investors could potentially boost their overall portfolio returns. 

With that in mind, today I want to highlight two exciting small-cap stocks that have outperformed the FTSE 100 by a wide margin in recent years.

Alpha FX

Alpha FX (LSE: AFX) is one of my favourite smaller companies. While the FTSE 100 has gone backwards over the last two years, AFX has more than doubled investors’ money!

An under-the-radar financial services company, Alpha specialises in providing foreign exchange (FX) hedging services to small- and medium-sized businesses. Combining high-level currency expertise with pioneering technology, the group helps companies manage their FX exposure more efficiently. Clients include high-profile names such as ASOS, Halfords, and Holland & Barrett.

The reason AFX shares have performed so well recently is that the company is growing at a prolific rate. For example, in its most recent half-year results, issued in early September, the group reported revenue growth of 60% and earnings per share growth of 49% (good luck trying to find that kind of growth in the FTSE 100!).

More recently, in an update last week the company advised that trading has continued to be strong and that it expects earnings for the year to be ahead of the market’s expectations.

Are AFX shares priced to buy today? Personally, I’d wait for a pullback before buying. Given that the share price is up nearly 40% in two months, I think there may be better buying opportunities ahead if you’re patient.

Impax Asset Management

Another small-cap stock that has outperformed the FTSE 100 by a significant margin is Impax Asset Management (LSE: IPX). It’s an asset management firm that specialises in sustainable investments – a huge growth area. Over the last two years, its share price has risen around 76%.

Like Alpha FX, Impax has grown at a rapid rate in recent years. For example, between its fiscal year (FY) 2015 and FY2018, the group’s net profit climbed from £3.6m to £11.4m, which represents a compound annual growth rate of 47%. And earlier this month, the company reported that its assets under management had grown 20% over the 12-month period to the end of September.

Looking at the investment case, I see considerable appeal in Impax. Profitability, as measured by operating margin and return on equity is high, while cash flow is healthy. The company also has a great dividend growth track record, having registered 10 consecutive dividend increases now.

Additionally, the valuation seems very reasonable – with analysts forecasting earnings per share of 12.8p for the year ending 30 September 2020, the forward price-to-earnings ratio is 20.2.

All things considered, I see Impax as a ‘buy’. I think the stock has the potential to keep smashing the FTSE 100 in the years ahead.

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.

Edward Sheldon owns shares in Alpha FX and ASOS. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Alpha FX. 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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

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 »