Just released: the 3 best small-cap stocks to buy now [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a portfolio of at least 15 small-cap stocks.

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Premium content from Motley Fool Hidden Winners UK

Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.

“Best Buys Now” Pick #1:

Ergomed (LSE:ERGO)

Why we like it: “Investing in the pharmaceutical industry has obvious attractions. Healthcare spending remains relatively robust — even during economic downturns — as people always need to see their doctors and take their treatments. Yet investing in the companies making the drugs many of us take can be a very hit-or-miss situation, even if you’re a PhD or MD. This is why we at Hidden Winners have instead long been attracted to the companies providing these pharma makers with the instruments, lab equipment, and support services that they need. Ergomed (LSE: ERGO) is very much in that vein.

“The company provides two main services for its clients. The first is PrimeVigilance, which assists customers (drug-makers) in their pharmacovigilance efforts (the process undertaken during and after drug trials to monitor clinical subjects for adverse events that may or may not be connected to the drug in question). The other division operates under the Ergomed brand and runs clinical research services. Both these services play into a wider trend in the pharmaceutical industry, that of outsourcing non-core tasks to specialist providers. The company ticks a lot of our boxes, being founder-led, in a fairly defensive and growing industry, with its shares trading at what could be an attractive valuation.”

Why we like it now: The recent full-year trading update from Ergomed showed the company recorded another positive year in 2022. Revenue was up 14.5% in constant currency terms to £145.3m (22.5% growth at actual exchange rates) with adjusted EBITDA expected to be in line with consensus estimates of circa £28m. There’s no certainty in life, but with its order books bulging at £295m at year-end and pharmaceutical firms keen to continue investing in drug development in the areas Ergomed focuses on, the short-term outlook for the group looks pretty good to us. Plus with net cash of £19.1m at the end of December, internal cash generation, and undrawn lending facilities of £80m, there is plenty of firepower to continue making bolt-on acquisitions and internal investments no matter the economic cycle. Ergomed isn’t cheap at 30x consensus 2022 earnings, but for a founder-led business catering to fairly defensive markets with a proven ability to provide growth in sales, profits, and actual cash flow, that doesn’t appear to be a ridiculous valuation.

“Best Buys Now” Pick #2:

Redacted

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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.

The Motley Fool UK has recommended Ergomed. 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.

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