Every month, we ask our freelance writers to share their top ideas for small-cap stocks to buy with investors — here’s what they said for December!
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Mind Gym
What it does: Mind Gym provides courses designed to boost workers’ happiness, productivity and leadership skills.
By Royston Wild. Trading news coming out of Mind Gym (LSE:MIND) has been quite impressive in recent weeks. Yet the AIM-listed business continues to trade in and around penny stock territory.
However, I think the small cap could be a great stock for investors to buy in early December. I believe the release of half-year results on Friday 2nd could remind the market of its excellent sales momentum and lift its share price higher.
Mind Gym provides services that help employees improve their wellness and their productivity. With mental health coming increasingly under the spotlight, demand in this niche market could be about to boom.
City analysts think so, too. They reckon Mind Gym — boosted by its acceleration in the digital arena — will record earnings growth of 31% and 129% in the financial years to March 2023 and 2024 respectively.
Turnover leapt 11% in the six months to September, the company announced a month ago. Despite the worsening economic backdrop, I’m expecting December’s update to paint another sunny picture.
Royston Wild does not own shares in Mind Gym.
Calnex Solutions
What it does: Calnex is a technology company that specialises in testing and measurement services for telecommunication networks.
By Edward Sheldon, CFA. Calnex Solutions (LSE:CLX) continues to generate strong growth on the back of the global 5G rollout. For the six months to 30 September, revenue was up 38% to £12.7m. Meanwhile, diluted earnings per share were up 34% to 2.67p.
Looking ahead, I see the potential for further growth. In its recent H1 results, the company said that investment in telecoms infrastructure to deliver next generation connectivity “continues at pace”. It also advised that it had a strong order book moving into H2.
One thing I like about Calnex, aside from the growth potential, is the fact that the company is founder led. Research shows that founder-led businesses often turn out to be good long-term investments. Founder and CEO Tommy Cook also owns a huge amount of company stock, meaning management’s interests are aligned with those of shareholders.
There are some risks to consider here. Component shortages/supply chain issues are one. Overall, however, I see a lot of appeal in the stock right now.
Edward Sheldon owns shares in Calnex Solutions.
Fisher James & Sons
What it does: Fisher James & Sons is a company focused on providing support and engineering services to the marine industry.
By Gabriel McKeown. It used to be tricky to find high-quality companies with low market capitalisation; however, the recent market turmoil has meant that there are now far more small-cap opportunities for UK investors. A prime example of this is Fisher James & Sons (LSE: FSJ), as the share price has fallen almost 85% from pre-pandemic levels.
Despite this share-price decline, the company’s earnings are forecast to grow considerably, signalling a rebound may be on the horizon. Earnings per share is expected to grow by over 40%, compared to 3% turnover growth, indicating that profit margins should improve. Additionally, free cash generation remains strong and is now above its three-year average level.
The company’s significant debt level has likely caused investors to avoid this opportunity. However, the interest cover ratio of 2.1 indicates that this can be covered comfortably by earnings. This financial stability is certainly encouraging, especially if market conditions begin to weaken.
Gabriel McKeown does not own shares in Fisher James & Sons.
Judges Scientific
What it does: Judges Scientific acquires and improves specialist scientific equipment manufacturing businesses serving a diverse range of industries.
By Zaven Boyrazian. Judges Scientific (LSE:JDG) owns and operates a diverse portfolio of scientific equipment manufacturing businesses acquired over the last two decades. It’s certainly catering to a niche market. Yet, its products are critical to the research process for many industries and scientific institutions.
Over the last five years, annual revenue growth has been a modest 5%. However, with management improving operational efficiency as well as exercising pricing power, operating margins have rapidly expanded from 1.7% in 2017 to 17.5% at the end of 2021. That’s more than double the industry average.
Being a highly acquisitive business does introduce some notable risks. The balance sheet could become compromised if the group executes an expensive buyout that fails to live up to performance expectations. However, given Judges Scientific’s track record of successful acquisitions, I feel this is a risk worth taking.
Zaven Boyrazian does not own shares in Judges Scientific.
Shoe Zone
What it does: Shoe Zone is a low-cost footwear retailer that sells shoes in over 380 stores across the UK and through its website.
By Harshil Patel. Shoe Zone (LSE:SHOE) reported higher sales over the past year. Its low-cost offering is proving to be popular as customers tighten their belts and face rising costs elsewhere.
It’s a founder-led, well-run business that keeps a tight lid on costs. Much of its future growth could come by expanding its larger store format and from online sales. So far, this strategy seems to be working.
Its double-digit profit margin is stable versus last year, but a drop in shipping costs could push it even higher next year.
I also like its growing dividends and share buybacks. Shoe Zone currently offers a dividend yield of 3%. With £14m of cash on its balance sheet, I’m pleased to note that it’s well funded.
As a shoe retailer, there is competition. And growing stores in an uncertain economic climate could be a challenge over the coming years.
That said, overall, I’d say it’s a resilient, and cash-generative business. It’s making excellent progress and I’d buy the stock for my ISA this December.
Harshil Patel does not own shares in Shoe Zone.
Aquis Exchange
What it does: a financial services firm operating through three divisions: Aquis Exchange, Aquis Stock Exchange, and Aquis Technologies.
By G A Chester. Founded and led by a veteran stock exchange technology pioneer, Aquis Exchange (LSE: AQX), is an industry innovator and disruptor.
Its core Aquis Exchange is a pan-European equities trading platform for institutional investors. It offers a ground-breaking subscription-based pricing model, rather than pay-per-trade. The company also owns Aquis Stock Exchange, a challenger to the London Stock Exchange‘s AIM market. Further revenues come from selling market data and licensing exchange software to third parties.
Aquis has a current market value of £118m. Revenue for 2022 is expected to be close to £20m (+15%), with pre-tax profit at just over £4m (+25%). Thereafter, annual top-line growth is forecast to accelerate to nearer 20%, with pre-tax profit growth up into the mid-to-high 30s.
I think the market’s being generous offering me the chance to buy Aquis stock at 21 times forecast 2023 pre-tax profit of £5.65m. Nevertheless, there’s a risk the shares could derate if growth were to undershoot the high level anticipated.
G A Chester does not own shares in Aquis Exchange.
Premier Miton Group
What it does: Premier Miton Group is a Surrey-based fund management company
By Paul Summers: Many listed fund managers have seen their share prices collapse as clients have become skittish over the global economy. AIM-listed Premier Miton (LSE: PREM) is no exception. Its value has fallen by more than half in 2022.
Based on analyst projections, the stock can now be mine for 14 times earnings. That’s not exactly cheap. However, it could turn out to be a bargain when market sentiment inevitably shifts and forecasts are revised. Importantly, Premier has the track record to lure investors back, with 88% of its funds in the first or second quartile of their sectors since inception.
Then there’s the income stream. Although dividends can’t be guaranteed, Premier is down to yield 9.5% in this financial year.
I think this might be a great contrarian play. That said, I would consider waiting until after full-year results are announced early in December before potentially buying the stock.
Paul Summers has no position in Premier Miton Group
Frontier IP
What it does: Frontier IP provides commercialisation and support services to very early-stage companies in exchange for founding equity stakes.
By James J. McCombie: Frontier IP (LSE: FIPP) was able to claim its first IPO listing of a portfolio company in its 2022 annual report, which generated £6.5m of cash in share sales. A further £3.4m flowed in after it sold more of the same shares. The hope is that cash flows like this could become a regular occurrence as the 24 companies in Frontier’s portfolio continue developing. And there are some exciting companies in there. One is developing a new family of antibiotics, and another turns landfill fodder into high-quality tiles and tabletops.
Frontier IP expends time and resources for equity stakes in companies that might have little more than an idea. Although the rewards can be great, many might return nothing, and now the lion’s share of operating income is non-cash. The portfolio approach reduces the risk of any one failure wiping out the company, but this is still a high-risk investment.
James J. McCombie does not own shares in Frontier IP.
Hotel Chocolat
What it does. Hotel Chocolat is a premium British chocolate retailer. It produces and distributes chocolate and other cocoa-related products.
By John Choong. Shares in Hotel Chocolat (LSE: HOTC) have declined by an eye-watering 70% this year. Its recent exit from the US market hasn’t helped investor sentiment either, as management now expects its FY22 to be loss-making and slower growth pencilled in for FY23.
The good news, however, is that the bad news has already been priced in, and Hotel Chocolat stock may have bottomed. But more importantly, the company can capitalise on a catalyst as the UK enters a recession. The ‘lipstick effect’ — where more affluent customers downgrade purchases to more ‘affordable’ items such as chocolate — could present a boost to sales for the firm.
Having said that, I should point out that upside potential for the stock remains limited according to Berenberg, who rates the stock a ‘hold’ with a price target of £1.55. So, in the coming days, I’ll just be dipping my toes in, and may buy more stock when the retailer’s outlook improves.
John Choong has no position in Hotel Chocolat.
