2 stellar small-caps that could make you brilliantly rich

Double-digit growth, sane valuations and huge addressable markets have these small-caps on my radar.

| More on:

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.

Although cybersecurity may be the hotter topic these days, physical security of products and protection against counterfeiting remains a vital multi-billion pound business for multinationals the world over. That’s why I have my eye on £50m market cap provider of banknote authentication and anti-counterfeiting systems Spectra Systems (LSE: SPSY).

The company began its life as a spin-out from the research of founder and CEO when he was a professor at Brown University in the US. Since then the company’s focus has been on providing authentication systems and anti-counterfeiting devices for banknotes for 19 central banks across the world. While this has been a steady and sometimes profitable business, there have been a few changes of late that interest me.

The first is a renewed focus on profitability, which has entailed a cost-cutting drive, a move to in-house manufacturing of its covert materials products, and the acquisition of a company making the phosphor-based materials used by central banks in banknote production. This has led to a rapid uplift in financial performance with revenue rising 48% in the year to June to $7.1m and adjusted EBITDA hitting $3m. The company is also cash flow-positive and with no debt and $9.4m of cash on hand, it has begun paying out dividends and intends to return all cash in excess of $5m to shareholders.

The second thing that is interesting me is the company’s push into authentication systems for physical goods such as luxury clothing and other items. Spectra has recently won regulatory approval to roll out its TruBand smartphone-based authentication system for cigarettes in China. If this trial goes well and Spectra is able to roll out the product to other goods and countries, its growth prospects are rather astonishing.  

However, success is still far from certain and with the company’s stock price up over 350% in the past year, a good deal of growth has already been factored-in. Would be-investors should do their homework and be cautious but I still see plenty of reason to be interested in Spectra Systems.

A bargain basement growth stock?

A much safer option is £240m market cap Alliance Pharma (LSE: APH). It takes a rather novel approach to business by avoiding expensive and hit-or-miss R&D in favour of simply acquiring already certified treatments and then doing what it does best, marketing them and finding distribution routes into new markets.

This has worked out very well for the company with revenue and EBITDA more than doubling last year, to £97.5m and £26m, respectively. Much of this growth was due to a large purchase, but previous acquisitions also continued to perform well with several growing by double-digits. With year-end net debt at 2.8 times EBITDA it’ll probably be a while before the company makes further large acquisitions, but impressive second half cash flow was already pushing down leverage, so they will come eventually. 

With its shares priced at just 12.8 times forward earnings while offering a decent 2.3% dividend yield, Alliance Pharma offers both a significant margin of error for investors and good growth prospects through organic expansion and further acquisitions.

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.

Ian Pierce 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

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 »