Small-cap shares are generally defined as companies with a market-cap between £50m to £230m. These type of firms are large enough to generate good profits, but small enough to have high growth potential before reaching maturity.
As such, I can find ideas that can generate me good profits if I choose the right ones. Here are a couple I have on my radar now.
It’s never just a game
Frontier Developments (LSE:FDEV) is a PC and console game developer. Popular games by Frontier include F1 Manager and Jurassic Park Evolution. The share price has dropped by 65% in the past year, with the bulk of that coming in the past few months.
The main reason for the drop was due to a trading update in January where the business announced it would miss revenue and operating profit targets for 2023, due to lower game sales than expected.
However, the half-year results (released just a few days later in January) actually were very positive. Revenue grew by 16% versus H1 2022, with the business also swinging from an operating loss of £1.3m to a profit of £6.9m.
Further, the business has a generous gross profit margin of 63%. This means Frontier is very efficient at controlling the cost of goods sold. In turn, this can help to filter down to a larger net profit.
Even though the expected miss on numbers this year is a risk, I don’t see it as a long-term problem. The business is still growing year-on-year. I feel over the course of this year it can recover the recent drop, providing me with a generous profit.
A growing global business
The second stock is The Pebble Group (LSE:PEBB). With a market-cap of £175m, it sits as a small-cap share. Over the past year, the share price is down 9%.
The company focuses on providing promotional products and services to other brands. This can range from the creative side to more on the delivery. It has offices all around the world, from China to Canada.
I like the business because of the global reach. Even though the company is still relatively small, it has a great foundation to expand due to the offices around the globe. Indeed, it’s already growing, with H1 2022 revenue up 29% on the same period the year before.
If it can continue this strategy, I feel the share price could start to take off later this year as it gets more media and investor attention.
One concern I do have is that the business might struggle to tap into big businesses, as some won’t outsource this area of marketing. It’ll be all cared for in-house, which could hinder growth further down the line.
On balance, I think both ideas could make me money this year, so am looking to buy now.
