Why I think these 3 UK small-cap stocks are bargain buys for 2021

Trading at discounts of up to 29%, and valued on temporarily depressed earnings, G A Chester reckons these UK small-cap stocks can bounce back in 2021.

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November’s destined to be the best month ever for shares. However, I’m still seeing plenty of opportunities in the market. Here are three UK small-cap stocks I think are bargain buys for 2021.

All are strong businesses, with attractive long-term growth prospects, in my view. Their shares remain temptingly cheap. They’re at discounts of between 16% and 29% to their pre-pandemic 2020 highs. Let me tell you more about them, and see if you agree with my positive assessment.

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Bargain UK small-cap stocks #1

Alliance Pharma (LSE: APH) owns the marketing rights to around 80 consumer healthcare brands and prescription medicines. The group had been producing strong sales and profit growth before the pandemic. However, the shares are currently 16% below their pre-pandemic high.

Alliance’s prescription medicine sales will be adversely impacted this year by delays in routine treatments, due to Covid-19. Also, some of its consumer healthcare brands have been hurt by lockdowns. For example, its eye-health supplement MacuShield hasn’t been done any favours by temporary closures of bricks-and-mortar retail outlets and opticians.

However, analysts expect strong growth at the group to resume next year. With products like Kelo-cote — the fastest-growing top five global scar treatment brand — in its portfolio, I reckon Alliance is cheap. It’s valued at 13.7 times forecast earnings, while a prospective 2.2% dividend yield is also decent for a growth company. Its balance sheet is in good shape too, with only a modest level of debt.

Bargain UK small-cap stocks #2

Carr’s Group (LSE: CARR) has an agriculture division supplying animal feeds, supplements and farm machinery. It also runs a UK network of rural stores, providing a one-stop shop for the farming community. Its other division is engineering. This serves a diverse range of industries, including defence, nuclear, oil and gas, and renewable energy.

Last week, the group issued results for its financial year ended 29 August. It reported a number of adverse impacts from Covid-19, such as engineering project delays and restricted access to customer sites. Group revenue was down 2% and underlying earnings fell 18.5%.

Meanwhile, its shares are currently 22% below their pre-pandemic high. This values Carr’s at just 10.5 times its pandemic-depressed earnings. There’s also a 3.8% running yield on its maintained divided. The group has modest debt, and significant growth opportunities within both its divisions. As such, I reckon this is another bargain UK small-cap stock.

Last but not least

Technology company Tracsis (LSE: TRCS) also issued its annual results last week. It reported a 2.5% fall in revenue for its financial year ended 31 July, with underlying earnings down 13.9%.

Its rail technology and services division was generally unaffected by the pandemic. Indeed, it increased revenue by 17%, helped by prior-year acquisitions. However, its traffic and data services division saw an 18% fall in revenue. This was due to some large events and transport data collection projects being either cancelled or postponed.

Tracsis’ shares are trading 29% below their pre-pandemic high. They’re valued at 24.2 times the earnings just reported. However, with almost £18m cash on the balance sheet and no debt, the cash-adjusted earnings multiple falls to 21.7. I think this is cheap for a small-cap technology stock on temporarily depressed earnings. Management remains confident in the medium-to-long-term growth prospects for all parts of the group.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Alliance Pharma and Tracsis. 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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