£3k to invest? I’d buy these small-cap stocks in an ISA to retire in comfort

Looking to build a nest egg with your Stocks and Shares ISA? Paul Summers thinks these market minnows could help improve your returns.

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Their ability to grow revenue and profits faster than your typical FTSE 100 giant means small-cap companies have the potential to generate far better returns and, consequently, a larger nest egg for retirement. Holding these stocks within an ISA also saves you from needing to pay any tax on the profits you make.  

Of course, there are no guarantees when it comes to investing. Here, however, are three minnows that I suspect will have rewarded investors by the time they’re ready to swap the office for the beach.

Future ISA star

As I predicted almost two months ago, online instrument supplier Gear4music (LSE: G4M) released some cracking numbers this week. The business has benefitted hugely from the lockdown with more people than ever learning and practicing music to pass the time

Naturally, the share price has reacted positively to news that profits have exceeded management expectations. Whether this momentum will remain near-term is hard to say. The lifting of restrictions could mean earnings have peaked for a while. 

On the other hand, the likelihood that many independent retailers on the UK’s high street will find the going tough could play into the £90m-cap’s hands. Indeed, CEO Andrew Wass has said Gear4music is “confident of continued financial improvements during FY21.

Regardless of what happens in the rest of 2020, I remain confident this stock could prove a real winner for long-term investors.

Move fast

Another small-cap stock that could reward patient ISA investors is software company Oxford Metrics (LSE: OMG).

Already operating in over 70 countries, Oxford assists firms in measuring and capturing motion. It does this via its infrastructure management-focused Yotta division or movement analysis Vicon business.

What I particularly like about this company is the diversity of its clients. These range from highways authorities needing help to manage road networks to film studios wanting support in creating visual effects. 

Perhaps unsurprisingly, Oxford’s share price hasn’t really recovered from March’s sell-off. It’s still 33% below the all-time high hit back in February.

While recent trading is unlikely to be good, I sense now might be an opportunity for ISA holders to acquire a slice of the business whose fundamentals have been steadily improving. The balance sheet also shows no signs of distress, boasting net cash of almost £11m.

Expensive…but worth it

Last on my list of small-cap opportunities is US-focused software firm Craneware (LSE: CRW). Its tech is designed to highlight operational and financial risks to hospital managers and how they can make things more efficient.

The thing to realise about Craneware is that its valuation has always been high. Despite the recent market crash, shares still trade on a forecast price-to-earnings (P/E) ratio of 31 for FY 21 (beginning in July).

Before dismissing the company, however, it’s worth mentioning that the five-year average P/E is 36. Moreover, Craneware has consistently shown why it deserves its premium rating. Margins and returns on capital are seriously high. It also dominates its niche and carries very little debt. This all piques my interest, even if the adoption of its new analytics platform is taking longer than expected. 

Craneware’s share price could remain under pressure if we get a second Covid wave/market crash. However, I’m having trouble finding reasons to see why it won’t reward ISA investors over the long term.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware. 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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