2 ‘under-the-radar’ small-cap stocks

These hidden small-caps have the potential for huge returns for investors who are willing to take the risk.

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Shares in investment management group Gresham House (LSE: GHE) fly under the radar of most investors even though the company’s growth is exploding. Indeed, today the firm reported an increase in asset management revenue of 100% and a growth of assets under management of 50% for the six months ending 30 June 2017.

However, despite Gresham’s rapid sales growth, shares in the business have barely budged over the past five years. So what’s gone wrong? 

What has gone wrong? 

Gresham’s speciality is alternative asset management, which simply means that the business invests money on behalf of clients into alternative assets such as property, renewable energy and venture capital funds. Profits from these activities are lumpy and the business has been unable to report a sustainable profit. 

Nonetheless, it looks as if management is now confident that the business really is on track to sustainable profitability. In today’s trading update CEO Tony Dalwood said: “The Group has achieved a number of milestones including passing through £0.5bn AUM….I am pleased to report that we are on track to achieve profitability on a run-rate basis in the second half of this year.” Pre-tax losses improved from -£1.2m to -£0.8m for the period under review. 

I’m excited about Gresham’s prospects. It seems that more and more investors are looking to alternative assets to provide returns as interest rates remain depressed and equity valuations continue to rise. The asset manager should benefit from this trend. What’s more, management has plenty of firepower to buy up bolt-on growth.

During the first half, the firm sold an inherited legacy property asset Southern Gateway for gross proceeds of £7.3m, allowing it to pay down outstanding debt and improving tangible realised assets to £27.4m — around 67% of Gresham’s current market cap.

Discount to asset value

Investors also seem to be overlooking the opportunity at real estate investment trust Palace Capital (LSE: PCA).

Just like Gresham, Palace is a specialist. The company’s area of expertise is commercial property and management has proven that it knows this area well. 

Since the end of 2014, shares in the REIT have returned around 71% excluding dividends as net asset value has expanded. Over the same period, Palace has paid out 51p per share in dividends for a total return of 90%, or around 17.4% per annum, an extremely impressive return for a company with a market capitalisation of less than £100m. For some comparison, over the past five years, the FTSE 100 and FTSE 250 have produced annualised returns of 9.4% and 14.7% respectively including dividends. 

And I believe Palace still offers value for investors. Today, the shares are changing hands at 383p with a dividend yield of 4.9%, but the net asset value of the firm is closer to 443p, 16% above the current market price. 

Considering the market-beating yield, and the discount-to-net assets value, I believe this could be an attractive buy for long-term investors seeking a steady income from property. 

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.

Rupert Hargreaves does not own shares in any company 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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