Are these small-caps value stars or value traps?

Royston Wild discusses the investment potential of two ultra-cheap small-caps.

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Concern over a sharp decline in car demand has weighed on the share price of Lookers (LSE: LOOK) in recent weeks. Indeed, the motors mammoth came within a hair’s breadth of hitting three-and-a-half-year lows just last month.

And stock pickers are quite right to be concerned over auto sales as we move into 2017. The Society of Motor Manufacturers and Traders (SMMT) recently announced that British new car sales edged 1.4% higher in October, a 4.1% rise in fleet car demand masking falling demand from private consumers. Sales to individuals slumped 1.1% last month.

But recent SMMT data shows a definite downtrend in new registrations in recent months, and this is expected to accelerate in the months ahead as rising inflation and moderating business confidence crimp buyer appetite.

Optimists will point to Lookers’ latest trading statement last week for reasons to be cheerful however, the firm advising that “we have not noticed any significant difference in terms of customer behaviour” since June’s EU referendum.

And many bargain hunters will also be drawn in by the company’s ultra-low valuations. For 2017 the business deals on a P/E ratio of 6.7 times, well inside the benchmark of 10 times or below indicative of high-risk stocks.

Meanwhile, a dividend yield of 3.8% should prick the ears of income chasers.

Still, in my opinion the prospect of sinking appetite for big-ticket items like cars from next year supersede these cheap ‘paper’ valuations, and I reckon there’s room for the share price to fall still further.

Marketing marvel

Like Lookers, communications colossus Communisis (LSE: CMS) has also seen its share price sink in recent sessions. But unlike the car retailer, I reckon this represents a great time for bargain hunters to pile in.

For 2017 Communisis deals on a P/E rating of just 5.8 times, while a dividend yield of 6.6% makes the firm one of the hottest income bets out there.

Communisis saw revenues edge 0.2% higher during January-June, to £174.9m, it advised in August, a result that propelled pre-tax profit 37% higher to £4.4m.

And while many large- and small-caps alike wince at the prospect of Brexit on future earnings, Communisis says that it expects to benefit from a rise in outsourcing activity should the UK economy experience a downturn. On top of this, the company’s bias towards statutory communications will leave it largely unaffected from any possible decline in marketing spend, it advised.

Allied to this, I’m convinced the firm’s rising international presence should protect it from worsening economic difficulties in the UK. And the firm’s strong relationship with blue chip customers should keep revenues sailing higher too — Communisis inked a blockbuster six-year contract with insurance giant LV= during the first half, for example, and also began working with Legal & General from April.

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Royston Wild 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.

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