“‘Sell in May and go away’ would not be a prudent move, in our view”, wrote Mitchell Fraser-Jones, head of investment communications for Neil Woodford, in a fund update this morning.

As a believer of “time in” the market, not “timing” the market, Woodford makes investment decisions based on years rather than months. He may be dubious about banks, oil companies and miners right now, but he does see “pockets of undervaluation” in the market, and is happy to be a buyer in these areas.

So I’m taking a look at three smaller companies whose valuations and prospects Woodford is excited about — and whose shares he’s been recently buying.

Strong market position

Woodford participated in the IPO of Hostelworld (LSE: HSW) at 185p a share last autumn, taking a 14.1% stake in the company. This FTSE SmallCap firm describes itself as “the world’s leading hostel-focused online booking platform”. Woodford is attracted by Hostelworld’s strong market position and growth prospects, as well as strong cash generation, which will see the board distribute an annual dividend of 70%-80% of profits.

Hostelworld’s shares have been rising since the IPO — currently trading at 268p — but Woodford has continued to buy, with his most recently notified purchase on 29 April taking his stake in the company to 21%. He sees the valuation as “attractive”, and I can see why. Forecasts from house broker Numis put this £256m company on a reasonable P/E of 15.5 with an eye-catching dividend yield of 4.9%.

Impressive prospects

Equiniti (LSE: EQN) has a few things in common with Hostelworld: it floated last autumn, it’s in the FTSE SmallCap index, and it describes itself as a leader — “in pension and loan administration, share registration and investment services”. Woodford bought in a placing at the end of last month (which, like the IPO, was priced at 165p a share), and currently has a 5.5% stake in the company.

Equiniti is described in today’s update from the Woodford fund as “a business with impressive prospects”. Despite a rise in the share price to 191p, the consensus earnings forecast for the current year puts Equiniti on an undemanding P/E of 12.5 with a dividend yield of 2.5%. According to data provider Digital Look, five brokers covering this £573m company all rate the stock as a buy.

Long-term optimism

Woodford first bought into CityFibre Infrastructure (LSE: CITY) in a placing at 50p a share in December, taking an 11.3% stake in the company. A notification earlier this week shows his stake has now reached 16%. The shares have been trading at near 60p in recent days, but this is another company whose valuation Woodford sees as “attractive”.

CityFibre describes itself as “a leading designer, builder, owner, and operator of fibre optic infrastructure in UK towns and cities”. Revenues are growing rapidly, but with the company investing heavily in infrastructure, profits are forecast to be negative for the next few years and, of course, there’s no dividend. CityFibre is valued at £159m in the market, or over 10 times current-year forecast sales, which, on the face of it doesn’t scream “value”, but perhaps Woodford is optimistic on a longer-term view.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.