Here are two UK small-cap stocks I’d buy right now

Uk small-cap stocks can offer great returns but are often very risky. I think these two shares are worth a buy because they have become less risky, but still have great potential.

| 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.

If you are looking for UK small-cap shares to buy, I think Surface Transforms (LSE:SCE) and Shield Therapeutics (LSE:STX) look like good picks for a portfolio. I think both have the potential to deliver the kind of returns small-cap stocks are known for, but they also look less risky now due to significant and recent business developments. 

A breakout UK small-cap stock

Surface Transforms makes carbon-ceramic brakes. Its proprietary method produces brake discs that are more durable and conduct heat better than its competitors. Surface’s main competitor owns almost all of the market, but the owners of BMW own most of it. Surface presents a compelling alternative for carmakers concerned about this BMW connection. 

After many years of trying to crack the market, orders are starting to grow. Surface won several new contracts in 2020. One of them – to be a sole supplier to a global customer – is a huge deal. To be a sole supplier, the customer must have complete confidence in the product and its delivery. Others will take note, and this could be the key that unlocks a chunk of market share in the future.

These new orders should push the company into profitability by 2021, and profits should continue to grow in 2022 and onwards. And I think there is more to come. The carbon-ceramic brakes market is worth around £200m and is growing. A 10% market share equates to revenues of over £20m per year – a significant improvement on the £1m in revenue reported in 2019. I think a 10% market share is achievable. So if you are looking to buy shares in a UK small-cap company, I think you should consider Surface.

Stock therapy

Shield Therapeutics is a pharmaceutical company. Its lead product, Feraccru/Accrufer, treats iron deficiency anaemia. Regulators have approved Feraccru/Accrufer and it is now commercially available. Getting past the approval stage and onto marketing and selling a drug is a significant milestone and reduces the risk of failure. Now the company needs to focus on increasing sales volume.

Shield finds marketing and distribution partners for the markets it wants to enter. The partners pay upfront and milestone payments and royalties on sales. Shield’s European partner sold more of the product in the first half of 2020 than in the whole of 2019. A deal with a distributor covering China, Hong Kong, Macau and Taiwan has been agreed this year and sales could commence as early as 2023.

Finding a US partner would be a game-changer for Shield, and could happen before 2020 is out. The deal with the Asian distributor is worth around £35m in upfront and milestone payments, and 10%–15% of net sales for at least 10 years. I would expect the US deal to be more lucrative. Combining European, Asian and US upfront payments and royalties on sales is expected to tip Shield into positive cash flow and consistent profitability from 2022 onwards.

Owning shares in Shield looks a lot less risky now. Getting to the point of actually making sales of a drug is a huge milestone. The next step is to scale up in existing markets and break into new ones. I think Shield is a UK small-cap stock to buy right now.

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.

James J. McCombie owns shares of Surface Transforms. 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 »