Picked carefully, small-cap stocks have the potential to deliver superior returns for risk-tolerant investors. With this in mind, here are two of what I consider to be the best shares to buy from this part of the London market.
Tasty profit
First up is fresh-cream-but-egg-free cake maker/retailer Cake Box (LSE: CBOX). Back in June, the company reported revenue and pre-tax profit had climbed 16.9% and 11.8% respectively over the 12 months to the end of March. That’s really something when you consider its stores had to temporarily close during 2020.
Thankfully, online sales took the strain. These rose 84%, supported by the development of its own delivery platform. In addition to this, CBOX has also been introducing new products that cater to vegans and those on gluten-free diets.
Based on its rapidly expanding estate, I think the future looks pretty sweet for the company. Operating a franchise model, it had 157 stores by the end of the financial year. A further nine franchise stores have since been added with the company targeting 18-24 in total over FY22.
Factor in many people wanting to celebrate important events they previously couldn’t and I think it unlikely trading will suddenly reverse. I’m also encouraged by CEO Sukh Chamdal still owning 32% of the company. If I’m to back a small business, I want to know those running it have a significant amount of their own cash at stake.
Hot market
Another stock that could prove to be one of the best shares to buy in the small-cap space right now is Property Franchise Group (LSE: TPFG). Now the largest property franchisor in the UK, the firm also manages the second largest estate agency network and a portfolio of lettings properties in the UK.
In its recent trading update, the company reported like for like revenue and management service fees were “significantly up” over the first half of 2021, compared to the same six months in 2020. While that might be inevitable considering the impact of Covid-19, this result also beat numbers from 2019.
The reason? A white-hot UK housing market has generated huge sales growth. Increasing prices have also allowed the company to collect a larger average fee. Since this shows no signs of slowing down just yet, TPFG now is confident of “a very strong trading performance for the full financial year“. The recent purchase of Hunters estate agents will no doubt help as well. As such, I think the shares could go higher from here.
Know the risks
Before buying either (or any) small-cap stock, investors need to be aware that their share prices have the potential to be highly volatile. Part of the reason is that minnows tend to have small ‘free floats’. This refers to the proportion of a company’s shares trading on the market. In practice, a small float means it only takes a bit of selling or buying to produce big swings.
There are more specific things to consider. Based on current earnings estimates, CBOX shares change hands for 25 times earnings. That’s not excessive, but nor is it a bargain either. A P/E of 14 makes Property Franchise far cheaper. However, it’s naturally exposed to a slowdown in the property market — although this may be some way off.
As always, it’s vital to keep expectations in check.
