Have you been neglecting these two cracking small caps?

These companies are performing well. Don’t let them pass you by!

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One of the best things about investing at the smaller end of the market spectrum is that these companies are unlikely to be as thoroughly researched by institutional investors. This can create price anomalies that can be exploited by eagle-eyed private investors. With a bit of skill (and a healthy dose of luck), a modest investment could transform into a small fortune over time.

With this in mind, let’s look at two companies that, in my opinion, rarely get the attention they deserve and ask whether their final results further underline their investment cases.

Good opportunities for growth

Melksham-based Avon Rubber (LSE: AVON) is a curious beast. The £314m cap operates in two quite disparate markets: providing liners and tubing to the dairy industry. and respiratory protection systems (a.k.a. gas masks) to military forces around the world. That said, this diversity hasn’t done it any harm at all. Over the last five years, its shares have more than tripled in value thanks to consistent earnings growth. The company also boasts superb returns on capital and excellent cash flow.

Today’s final results suggest the good times are set to continue. Operating profits rose 8% with diluted earnings per share rising a very decent 33%. Those who like their companies with solid balance sheets may also be interested to learn that Avon now boasts a £2m net cash position, in contrast to 2015’s net debt figure of £13.2m. 

Commenting on the results, CEO Rob Rennie reflected that the company finishes the year as “as a more robust business with a range of good opportunities for growth“. Indeed, with recent acquisitions successfully integrated, a new multi-million dollar order, and increased market share in both the US and in Europe, Avon’s future is looking bright.

Already up 3% in early trading, today’s price of 1034p leaves its shares trading on a forecast price-to-earnings (P/E) ratio of around 17. To me, this valuation feels reasonable, especially as the company may be a beneficiary of Trump’s pro-defence stance over time.

Great returns

Like Avon Rubber, AB Dynamics (LSE: ABPD) is another company with a consistent history of generating great returns on capital and high operating margins. The £83m cap supplies advanced testing systems to the global motor industry and with revenue jumping 23.9% to £20.5 million and operating profits up 16% to £4.4m, today’s final results should be well received by those already invested.

Operational highlights include record sales of its Track Testing products and a successful entry into the vehicle simulator market. With construction already underway, the company also plans to complete its new factory by Q3 of 2017. Perhaps most positively, the company’s solid order book covers revenues to the same quarter.

Despite a solid run over the year or so, shares in AB Dynamics currently trade on a forecast P/E of just under 17 for 2017. I feel this is rather undemanding given the high growth prospects ahead thanks to the company’s growing involvement in autonomous/driverless vehicles.

Worth the risk?

Based on their latest sets of figures and fair valuations, both Avon Rubber and AB Dynamics are worthy of consideration by investors, in my opinion. That said, given their tendency to be more volatile, it should always be stressed that investing in smaller companies can be a nerve-shredding experience unless you’re sufficiently diversified (as every Fool should be) and risk-tolerant.

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 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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