I’ve spotted 2 small-cap stocks with big-cap potential

Jon Smith points out two small-cap stocks that he feels have bright futures ahead based on recent company-specific updates.

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Small-cap shares can be an area of the stock market that frightens some people off. I, like many, have been burnt by a small stock that drastically fell in value very quickly. However, there are plenty of listed stocks on the London Stock Exchange that have a market cap of £100m or less that I don’t think are flash-in-the-pan ideas. Here are a couple I’ve spotted that could become large-cap firms in the future.

Proven innocent

Litigation Capital Management (LSE:LIT) is a company that does what it says on the tin. The firm provides financing for businesses and individuals to pursue litigation claims. It makes money by taking a cut of any of the cash recovered from successful claims. This can be quite a chunky amount, ranging from between 15% and 40%, depending on the level of finance.

The share price is currently at 71p, having fallen 34% over the past year. However, the stock is up 42% over a broader three-year timeframe. The moves do reflect a key risk of investing in small-caps — volatility!

Fundamentally, I don’t feel the move lower over the past year is that justified. In recent months, the business has done well with cases being won. An example was the victory with Carillion against KPMG, that yielded a seven-figure sum for Litigation Capital Management.

Going forward, I think the market cap (and share price) for the business is heading higher. As a case in point, the latest results through to the middle of 2022 showed a cash figure of £41.6m. Yet the current market cap is only £86m. When I add on other assets and forecast revenue growth, I feel this won’t remain a small-cap stock in years to come.

Time for more than a pint

The second company is The City Pub Group (LSE:CPC). It owns and operates 43 pubs, mostly around the South of England. It has a solid portfolio within central London, including notable locations in places such as Paddington, Chelsea and Fulham.

The business has bounced back from the struggles of the pandemic. In comparison to H1 2021 revenue of £8.9m, the same period in 2022 yielded revenue of £26.1m. This allowed it to flip from a loss of £2m in H1 2021 to an adjusted profit of £1.3m in 2022.

In the most recent trading update for 2023, figures are running ahead of expectations. I think the outlook is rosy for the summer and beyond. The pubs are mostly in affluent areas, where the cost-of-living crisis isn’t as pronounced. This should help spending to remain elevated.

Granted, high cost inflation is a concern. The rising price of food and drink will cut profit margins, and this could drag 2023 profits down. However, I think most of this could be offset from higher revenue.

The share price is down 4% over the past year. If we get a strong summer of trading, followed by the UK economy outperforming next year, I think the share price could rise significantly. I want to buy both stocks when I have some spare cash.

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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