2 small-cap stocks headed for profitable recovery

These 2 small cap shares have plunged, but they could be set for strong recoveries.

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.

It’s not nice when a company’s share price takes a dive. But when it happens, it can often throw up a nice recovery candidate. Here are two that I reckon have tempting potential.

Technology services

Servelec (LSE: SERV) provides software, hardware and related services across a wide range of industrial sectors, including healthcare, education, oil and gas, utilities, broadcast, and rail.

Things were going swimmingly until 15 June last year, when the company issued a profit warning and told us it was going to fall short of its 2016 expectations. The shares slumped by 32% to 237p on the day, although they have since recovered, and currently stand at 280p, on the day the preliminary results were released.

The results were in line with revised expectations, and showed a 29% fall in pre-tax profit from continuing operations, leading to an 11% fall in adjusted EPS. But the full-year dividend was lifted by 10% to 5.65p per share, and signs of recovery were starting to show. Highlights include a strengthening order book, the company’s automation business recovering “on the back of significant project wins“, and several acquisitions being made.

Chairman Richard Last said that the “situation around procurement delays, noted in our trading update in June 2016, has improved and we are optimistic that Servelec will return to growth in 2017“, and the City’s analysts appear supportive with a 20% rise in EPS penciled in for this year followed by a further 9% in 2018.

The dividend is expected to keep on rising ahead of inflation, and though it’s set to yield only a little over 2%, it should be very well covered by forecast earnings.

It’s often suggested that profit warnings come in threes, but I don’t see that here and I think Servelec is on the happy road to recovery.

Treble whammy

The first warning from St Ives (LSE: SIV) came in April 2016, telling us that “the outlook for the final quarter, and for the following financial year, has deteriorated“. Then the printing and marketing services firm added in January that its pursuit of new business was “taking longer than previously anticipated” and that we will not see “full benefit of the new work we have won until the final quarter of the current financial year“.

If that wasn’t enough, in February we heard that a contract with HarperCollins will not be renewed when it ends in June. That’s three bits of bad news, and three hits to the shares, which are now trading at 52.5p — but at least the firm’s first-half results haven’t done any further damage.

In fact, I think the worst is probably over and I see St Ives’ recovery efforts as starting to bear fruit. The firm stressed the importance of its Strategic Marketing business, with chief executive Matt Armitage speaking of “a number of exciting new projects being won from existing and new clients” and telling us he is confident of its long-term growth.

Mr Armitage added that the firm is considering options for its Marketing Activation and its Books segments, so we could see something drastic there in the coming months and that might cause a little more share price volatility.

But with forecasts putting the shares on a forward P/E of only 3.9 for this year and 4.3 next, I see more pessimism built into the share price than is deserved. I see a risky but potentially profitable recovery investment.

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.

Alan Oscroft 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »