Capitalising on value stocks is how major investors such as Warren Buffett built fortunes the size of mountains. The concept is simple. Find a high-quality enterprise trading at a discounted price, then just buy and hold. While there are a few nuances to consider, this technique, combined with patience, can be exceptionally lucrative.
With the stock market still reeling from last year’s corrections, finding bargain buying opportunities is far easier than normal. After all, with pessimism and fear still reigning supreme, emotional decision-making from panicking investors is dragging down the valuations of even the best enterprises.
There are quite a few shares on my radar right now. However, one small-cap stock, in particular, continues to impress.
A new king in electronics?
Solid State (LSE:SOLI) is a supplier, designer, and manufacturer of specialist electronic components for a wide range of industries, including industrials, commercial, medical, and defence. Some examples of its products include battery systems, digital displays, imaging technology, and radio antennas, among countless others.
Despite only having a market capitalisation of around £140m, the firm has already established strong ties within the global defence sector. In fact, it has direct access to multiple NATO agencies as well as a close relationship with BAE Systems – a top-tier aerospace & defence business. And looking at the latest results, these relationships have proven exceptionally handy.
It’s no secret that the last couple of years have been filled with tragic geopolitical conflict, kicking off in Ukraine and now Gaza. As such, military spending is on the rise. And that’s created quite a favourable tailwind for Solid State, which just reported 48.1% revenue growth, pushing half-year sales to £88m. Meanwhile, after stripping out the effects of stock-based compensation and acquisition-related expenses, earnings are up 66.7%, reaching £7m.
As such, management now expects to exceed analyst sales and earnings forecasts of £147.3m and £11.9m, respectively, for its 2024 fiscal year ending in March. And pairing this impressive level of growth with a robust balance sheet and a price-to-earnings (P/E) ratio of just 19, Solid State looks relatively cheap in my eyes.
Risk versus reward
Investing in small-cap stocks comes with its own set of risk factors. After all, these types of businesses are far more susceptible to macroeconomic factors, which typically translates into higher levels of volatility – something that the Solid State share price is no stranger to.
The tailwinds of increased defence spending from the UK and the US are an encouraging sight for this business. But the recent stellar performance in this sector may be covering up weakness in others.
The group’s open order book has actually shrunk from £112.5m to £99.7m since September 2022. This isn’t too surprising given that the electronics sector, in general, seems to be seeing reduced demand driven by the current economic landscape. In fact, this was one of the main contributing factors behind the recent slide in XP Power – a leading competitor.
As such, should defence spending growth start to slow before demand returns from its other target markets, the stock may be unable to maintain its current momentum. Nevertheless, with a track record of defying expectations, I’m cautiously optimistic about the long-term potential of this value stock.
