Momentum is a powerful force in investing. Once a share price gathers pace, it could go far higher than one might expect. I suspect this will be the case with many UK small-cap shares in 2021 as the stock market rally continues. I’ve been looking at three examples I think are likely to continue making good money for investors like me in the months ahead. I already own one of them and have the others on my watchlist.
Momentum share for a stock market rally
Harry Potter publisher Bloomsbury (LSE: BMY) enjoyed a magical 2020 thanks to more of us picking up a book or 10 during lockdowns. Back in October, the firm revealed a 10% rise in revenue (to £78.3m) and 131% jump in pre-tax profit (to £3m) over the six months to the end of August. Since we’re now into our third national lockdown, I can see this performance lasting a while longer.
Bloomsbury’s financial year ends next month. However, it probably won’t be until May that the company reveals how it’s performed over the last few months. That said, this does allow me time to take a position before the news is announced.
Of course, whether the company can sustain recent momentum once the stock market rally has run its course isn’t a given. But I’m encouraged by it having plenty of cash on its balance sheet and reinstating dividends.
Somero expects to post revenue of roughly $88m for the full year thanks to excellent trading in North America. This is far more than the $80m analysts were predicting. Adjusted earnings (EBITDA) of about $26m will also be “significantly ahead” of the $21m previously expected.
I can see Somero carrying this form into 2021, even if further planned investment in staff will temporarily impact profits. Demand for its products in the US looks likely to be sustained based on feedback the company has received. A revival of business in Europe and other markets once Covid-19 is conquered is also possible.
Factor-in a special dividend from cash-rich Somero and a forecast P/E of 14 for FY21 and it looks attractive to me in a stock market rally.
Bath-based eyewear maker Inspecs (LSE: SPEC) is another small-cap stock showing positive momentum.
It wasn’t always this way. The shares fell 25% not long after their debut on the market last February. After recovering over the summer, they fell again in September and October, highlighting the volatility of small-cap shares that investors need to be aware of.
More recently, the performance has been much better. The shares have almost doubled in value since November. That’s quite a result considering we’ve heard very little from Inspecs over this period. No matter. I think the best stocks for me to own are often the ones not making headlines.
On 28 times forecast FY21 earnings, Inspecs looks expensive. But I think the PEG (price-to-earnings ratio/earnings growth) ratio of 1.6 is worth paying attention to. This implies the shares may actually be trading at a fair-rather-than-excessive valuation given the company’s potential. Add in its global reach and non-cyclical market (those who need glasses get glasses) and I think the £350m cap becomes an increasingly enticing investment proposition.