Although there’s no exact definition of a small-cap stock, I classify any company with a market cap around £100m or below as being in this category. And even though smaller firms carry higher risk, they also have the potential to generate me very high returns. When sifting through ideas to see what could double my investment over time, I think this FTSE stock is a good option.
The story behind the stock
For those of us who live in London, the green-and-yellow Minis of Foxtons (LSE:FOXT) are a familiar sight. The estate agent proudly states that “we generate over 2,000 new buyers and 11,000 new renters each week”.
Since 1981, the business has grown to be the leading estate agent in London. It currently sells a property every 88 minutes. Foxtons was listed on the stock exchange back in 2013, but the share price is down 12.5% over the past year.
It wasn’t always classified as a small-cap stock. In fact, when it first went public, the company had a value of around £750m. This has fallen to around £110m today, something that will cause some to raise their eyebrows!
The largest hit to the business in recent years came with the market crash in early 2020 when the pandemic began. The share price halved in value within the space of a month and hasn’t been able to recover to previous highs since then.
A positive view from here
Even though property prices have been falling (and mortgage rates rising), Foxtons has performed well recently. In a trading update last week, it noted that revenue and adjusted operating profit are expected to be above market expectations for 2022. Revenue growth of 11% year on year is very strong given the situation in the property sector.
The share price is up almost 19% over the past three months, showing that investors clearly think the business is also bucking the broader trend.
Why I think the stock could double
From current prices, I’m targeting a move back to the 70-75p region. The share price was last here in February 2021.
Financially, the business is now larger and more profitable than it was then. So that isn’t the main driver. I feel that Foxtons’ outperformance within the property space and market sentiment towards the property market will be the two key points.
I feel that the business can continue to outperform in 2023. Even if sales are slower, rental demand in London is sky-high right now, due to people who can’t afford to buy. This should help to keep revenue elevated. At a time when homebuilders and other stocks that are property-related could struggle, I think investors will pivot into buying Foxtons shares.
The second element is restoring market sentiment back to 2021 levels. Granted, this is unlikely to happen this year. But I do feel that within the space of the next few years, an economic recovery will put us back in that place. When it does, I’d expect the share price to lift back to the same level as early 2021 (double from the current level).
High mortgage rates and a new CEO are both risks for the year ahead. But I think the potential rewards outweigh the risks, so I’m looking to buy the stock now for my portfolio.
