These small-cap stocks are trading at large discounts

These two companies could offer upside potential in the long run.

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Buying shares with wide margins of safety is generally viewed as a sound investment strategy in the long run. Not only can it provide limited downside, shares trading at discounts to their intrinsic value can also offer greater capital growth potential than their index peers. While finding such stocks is now more difficult while the FTSE 100 trades close to a record high, there are still potential buying opportunities available. Here are two smaller companies which could be worth a closer look.

Bright future

The recent update from electrical component and control equipment manufacturer, Dewhurst (LSE: DWHT), showed that it is making encouraging progress. In the first half of the year it recorded sales growth of 22%, with pre-tax profit up 76%. Its performance was aided by a weaker pound, with revenue of £26.1m receiving an uplift of around 10% due to currency fluctuations. However, the company also achieved growth in local sales values at all of its companies, with its North American operations being the only area where revenue declined.

The company’s outlook outside of the UK remains positive according to its recent update. While the UK may be experiencing a slowdown after the general election and as Brexit talks commence, demand in Australia and parts of North America continues to be robust. This is set to contribute to a rise in earnings of 19% in the current financial year. Since Dewhurst trades on a price-to-earnings (P/E) ratio of 16.7, this equates to a price-to-earnings growth (PEG) ratio of only 0.9. This suggests that it offers a wide margin of safety and could be worth a closer look.

In addition, dividends per share are set to be covered 4.1 times by profit in the current year. This suggests that the company’s dividend yield of 1.7% could increase over the long run and add to its attraction as an investment.

Cheap price

While Dewhurst may have a wide margin of safety, it is not the only stock to do so. Supplier of power cords and cable assembly solutions, Volex (LSE: VLX) trades on a P/E ratio of just 10.2 at the present time. This suggests its share price could continue to rise even after its 86% gain during the course of the last year.

One reason for the company having a low rating could be its volatile bottom line. Over the past five years it has been lossmaking in three of them, while sharp improvements in profitability have generally followed. Investors may therefore be including a discount to the company’s valuation in order to protect against further volatility. However, next year profit is expected to rise by 11%, which puts the company’s shares on a PEG ratio of only 0.7. This suggests they offer growth at a reasonable price.

While Volex does not currently pay a dividend, its low valuation could make it a relatively attractive stock at the present time. Many stocks are trading at or near record highs at present, which could make cheap stocks even more in demand among investors.

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.

Peter Stephens has no position in any 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.

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