2 ‘secret’ small-cap stocks offering the perfect blend of value and growth

These two small-caps could be interesting additions to your portfolio if you’re looking for growth and income.

| 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.

In my view, Minds + Machines (LSE: MMX) could be one of the AIM’s hidden gems. The company, which provides internet domains and related services, has seen the value of its shares rise by around 50% since the beginning of 2016 as sales have steadily improved. 

However, despite rising sales, profits have remained elusive, but it looks as if this is about to change. 

Maiden profitability 

According to the company’s first-half results published today, renewal billings nearly tripled to $3.1m while renewal revenue more than doubled and now accounts for 45% of revenue, compared with just 15% in the same period last year. This growth means that renewal billings are now higher than fixed operating expenditure, which came in at $2.6m for the first half. 

Heading into the second half, MMX is primed for further growth as management has decided to hold back key 2017 inventory releases. Billings eased to $5m from $8m the year before. However, sales of roughly $6m have already been achieved during the third quarter, bringing year-to-date sales level with 2016. Commenting on the results the firm said: “The first half of 2017 has been a period of consolidating the transformational progress of 2016 and establishing a solid platform for the business to deliver its maiden year of profitability as an operating business in the current year.

With $15.3m of cash at the end of August, MMX has a strong balance sheet to support growth. I believe that the market will re-rate the shares when the company reports its maiden profit. 

Hidden from view 

Time Out Group (LSE: TMO) went public in mid-2016 but has so far failed to attract attention from investors. Indeed, the shares have barely budged over the past year. Nonetheless, I believe it’s only a matter of time before the market catches on to the opportunity here.

Time Out owns the Time Out magazine brand and a string of food markets. With a global monthly audience of 242m, the group has a huge base of customers and viewers to try and sell its offering to. What’s more, this audience is multiplying, up 77% year-on-year for the first half of 2017. 

Unfortunately, this growth is proving costly. The group’s pre-tax loss rose to £16.3m for the six months to the end of June, up from £8.5m in the year-ago period. Revenue increased by 13% to £18.7m from £16.6m. In the Time Out Market business, Miami is set to open in 2018, with a lease agreement close to completion in a second major city and the group considering new global locations. With approximately £30m cash on hand at the end of the first half, Time Out has plenty of funding to fuel further growth. 

City analysts are expecting the company to break even in 2019. Losses of £19.5m are projected for full-year 2017, falling to £4m for 2018 as revenue expands from £45m to £69m. If sales continue to expand at this rate, shares in Time Out will warrant a growth multiple as profits start to grow. Based on current gross profit margins, I estimate that the firm could achieve a pre-tax profit of £10m or more by 2019, indicating that today the shares are trading at a 2019 pre-tax multiple of 20. This looks too cheap to me. 

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 considered so you should 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.

More on Investing Articles

Cheerful young businesspeople with laptop working in office
Investing Articles

5 dividend stocks with 5%+ yields I’d buy now

These dividend stocks should deliver reliable yields of between 5% and 8%, which means they appeal to Roland Head.

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

2 ‘irresistible’ FTSE stocks to buy before the market recovers!

For me, the FTSE is the most attractive index to invest in. Valuations are low and yields are high. So…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Is NIO stock a buy at $20?

NIO stock has been pretty volatile over the past few months. Here, Dylan Hood takes a look to see if…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

I’m buying more Lloyds shares at 45p! Here’s why

Lloyds shares look cheap to our writer at present. Charlie Carman outlines the factors behind his decision to invest more…

Read more »

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

When will the Rolls-Royce share price recover?

The Rolls-Royce share price may be down, but cash flows are surging! Zaven Boyrazian explores how long it could be…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

1 dirt-cheap FTSE 100 stock I think could TRIPLE my money!

Demand for lithium is forecast to surge by 42 times, enabling this FTSE 100 stock to potentially supercharge its profits…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I invest in the FTSE 100 – or try to beat it?

Our writer has the option of investing in a FTSE 100 tracker fund. So why does he choose to buy…

Read more »

Young black woman walking in Central London for shopping
Investing Articles

£1,500 to invest in a Stocks and Shares ISA? Here’s how I’d do it

Our writer has been investing in his Stocks and Shares ISA. Here he details how he could put £1,500 in…

Read more »