2 secret small-cap stocks I think could be perfect ISA additions

Paul Summers takes a closer look at two market minnows showing great momentum.

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.

Thanks to their ability to grow at a faster clip, small-cap stocks have the potential to generate far better returns for investors than your typical FTSE 100 or FTSE 250 beast, particularly if they’re also held within a tax-efficient account like a Stocks and Shares ISA. Today, I’m looking at two relatively tiny stocks whose defensive qualities and recent positive momentum have caught my eye.

Not so toxic

I’d bet that most retail investors won’t have heard of £200m cap Augean (LSE: AUG). The AIM-listed, Wetherby-based business specialises in hazardous waste management — hardly the sexiest of line of work and unlikely to hit the radars of those searching for the next big tech play. When it comes to making money in the markets, however, what’s ugly/boring can often be very lucrative (see self-storage firms and pest control businesses).  

Back in October, the company announced that strong trading over the third quarter would likely see adjusted pre-tax profit for 2019 come in “materially ahead” of previous market expectations of £16.5m. Today, it followed this up by stating that this encouraging performance had continued over Q4 and that the number would now be “at least in line” with analysts’ new predictions of £18.4m. 

Of course, all this good news hasn’t gone unnoticed by the market. Augean’s shares were already up a little over 50% since October before this morning, highlighting just how lucrative small-cap investing can be even over the short term. 

Although one might argue that the ‘easy money’ has already been made, I suspect there could be more gains to come for those willing to hold for the medium-to-long term, especially as the company still trades on a very reasonable 12 times expected FY20 earnings and has a market capitalisation of just £84m.

The only negative in all this is that Augean won’t appeal to those looking for income alongside growth as the company doesn’t currently pay out any of its earnings as dividends. 

Record profits

Another market minnow that’s hit my radar recently is 100 year-old elevator parts supplier Dewhurst (LSE: DWHT). 

December’s results for the full-year to the end of September were certainly very positive with the company reporting record sales of £56.4m — up 23.4% from the previous financial year. Adjusted operating profit also broke records, coming in at £7.7m — up 28.3%.

Like most companies, Dewhurst’s management likely cheered the outcome of the General Election since it provides a bit more certainty on trading going forward. That’s not to say that the company is wholly dependent on the UK as it also has a presence in the US (a market it describes as “strong“), Australia (described as “steady“), plus Canada.

Like Augean, Dewhurst’s shares aren’t exactly pricey at the moment, despite making great gains over the last year (+54%). A forecast price-to-earnings ratio of 12 for FY20 looks good value, particularly given the defensive line of work the company operates in (I’m pretty sure a quicker method of moving between floors in a building is yet to be discovered!) and the fact that Dewhurst has no debt on its books.

There’s even a dividend. The anticipated 13.5p per share payout in the current financial year equates to a yield of 1.7%, hardly massive but still worth having. Holding Dewhurst’s stock within an ISA also means that holders won’t be taxed on this income either.

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.

Paul Summers has no position in any of the shares mentioned. 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

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »