With £3,000 to invest in the stock market rally, I think these UK small-cap shares will keep rising in 2021

Paul Summers takes a closer look at 3 small-cap shares that had an excellent 2020. He thinks there could be more to come in the stock market rally.

| 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.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Rocketing revenue

With its share price soaring in recent months, my decision to buy a stake in laser-guided equipment manufacturer Somero Enterprises (LSE: SOM) in 2020 was one of my better calls.

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.

Looking good

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.

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.

Paul Summers owns shares of Somero Enterprises, Inc. The Motley Fool UK has recommended Bloomsbury Publishing and Somero Enterprises, Inc. 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 ways to make money from a stock market crash

This writer's not spending time trying to guess when the next stock market crash will be. Instead, he's getting ready…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

How this rocketing FTSE 250 stock is tapping into the billionaire-making AI revolution

As the AI revolution mints new billionaires, this high-flying FTSE 250 company has been making its shareholders wealthier too.

Read more »

Investing For Beginners

4 actionable stock market investing habits that can boost my profits

Jon Smith looks at the stock market and explains how he picks the right shares to buy, running through a…

Read more »

Investing Articles

The Standard Chartered share price leaps on FY dividend and buyback news. Time to buy?

An 8% jump for a UK-listed bank on 2023 results? That's what just happened to the Standard Chartered share price.…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Can Lloyds shares get any cheaper?

Lloyds shares have fallen further following the release of the bank's 2023 results. This Fool senses now is a time…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£7,000 of money to spare? Here’s how I’d aim to turn that into £1,000 in annual extra income

Christopher Ruane explains how he would aim to generate a four figure income to cushion his future, all with dividend…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Is this stellar dividend growth stock the only no-brainer buy on the entire FTSE 100?

Picking shares requires careful thought and analysis, but this FTSE 100 growth stock appears to be pressing all the right…

Read more »

Investing Articles

I bought 422 Glencore shares in July and 232 in September. Here’s what they’re worth now

Glencore shares have had a rough ride leaving Harvey Jones out of pocket. Should he cut his losses or average…

Read more »