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Should you be stocking up on these ‘secret’ small caps before results come in?

Photo: Stock Spirits Group. Fair use.

It’s often forgotten that private investors have a distinct advantage over many professionals in their ability to buy shares in companies that the latter don’t have time to research or purchase in sufficient bulk.

With this in mind, let’s look at two small-cap businesses, both of which release results to the market in the near future and ask whether either is deserving of your capital.

Viva la revolución!

It’s been a rather good first year as a listed company for Revolution Bars (LSE: RBG) and its shareholders. Priced at 168p 12 months ago, stock in the 66-strong premium bar operator now changes hands for 204p — a 21% increase.

Based on January’s trading update for the 26 weeks to the end of last year, I can see this kind of performance continuing in 2017. Overall sales at the Ashton-Under-Lyne-based £101m cap were 12.7% higher (at £66.6m) than for the same period in 2015. Christmas and New Year were also particularly strong with Group sales rising 16.2% over the five-week festive period. 

In H1, the company opened four new Revolución de Cuba bars in Harrogate, Aberdeen, Reading and Glasgow. A fifth — in Southend on Sea — is due to open in H2. Seemingly keen on developing its pipeline, I wouldn’t be surprised if next Tuesday’s interim results included details of new locations the business was targeting.

Trading on a price-to-earnings (P/E) ratio of 12 in 2017 (reducing to just under 11 in 2018 based on earnings estimates), Revolution’s stock carries an appealing valuation. What’s more, its low price-to-earnings growth (PEG) value of 0.9 suggests that investors won’t be paying through the nose to be a part of management’s plans to expand the business.

The 2.7% yield on offer from Revolution might seem low to some but this is projected to rise to 3% in 2018 and compares favourably to that offered by peers like J D Wetherspoon. The fact that payouts will be covered over three times by earnings leads me to suspect that dividends will continue to grow at a fair clip over the medium term. The company’s net cash position will also be highly attractive to investors keen to avoid companies weighed down by debt.

Strong cash flow

Holders of premium branded spirits and liqueur producer Stock Spirits (LSE: STCK) also enjoyed a profitable 2016 with shares finishing the year 31% higher than where they started.

Like Revolution, Stock Spirits provided an update to the market back in January. Despite “highly competitive trading conditions“, there were indications that business remained robust, particularly in Poland where the group has the second largest share of the market.

According to the company, cash flow was strong with net debt standing at around €60mWhile slightly higher than 2015’s figure, this is certainly a lot less than a few years ago when debt levels were over €300m.

With sales of alcohol remaining resilient even during times of economic uncertainty, those concerned by Brexit may wish to take a closer look at the company. Exporting over 40 brands to more than 40 countries worldwide, a lack of geographical diversity isn’t an issue with Stock Spirits.

Trading on 17 times earnings for 2017, shares might be more expensive than those of Revolution Bars but this valuation compares favourably to industry peers such as Diageo (22) and Fevertree (55). While I’m inclined to wait until full-year results are announced on 8 March, it’s a tentative buy from me.

Top small cap

If neither Revolution Bars or Stock Spirits whet your investing palette, you may prefer another company identified by the experts at the Motley Fool. Thankfully, this niche small cap appears to be off many investors' radars for now but who's to say how long this will be the case.

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Paul Summers 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.