Small-cap stocks have had a rough few years, but some could explode in 2024. This is because many high-quality companies saw their shares fall due to panic rather than poor fundamentals.
In 2023, the FTSE 100 rose 3.8% while the FTSE Smallcap Index largely had negative returns until the end-of-the-year rally helped it break even.
In bad times, people tend to gravitate towards large-cap stocks for their stability. Retail investors panic and sell their holdings in small-cap stocks. This is seen with the fact that UK small-cap funds have seen consistent withdrawals since late 2021.
As a result, good small-cap companies get dumped along with the rest. Personally, this makes them very attractive to me since many are still undervalued. Now, institutional portfolio managers from Dunedin Income and Shires Income are planning to invest.
Given that inflation has consistently gone down and rates have peaked, stocks as a whole could see a lift in share prices and ought to help small-cap companies recover.
Brickability Group
Brickability Group (LSE: BRCK) is a collection of construction companies that work together to provide building materials and contracting services.
As the UK government plans to invest billions of pounds to fix crumbling infrastructure and secure enough affordable housing, construction companies are prime targets to capitalise on this trend.
Unlike most construction companies in the sector, Brickability stands out as having one of the best financials. Its revenue has grown from £163.3m in 2019 to £681.1m in 2023, a 42.9% compound annual growth rate (CAGR). Meanwhile, profits have soared from £6.5m in 2019 to £27.7 in 2023, a 44% CAGR. It also pays a respectable dividend, with a 5.42% yield.
| Year | 2019 | 2020 | 2021 | 2022 | 2023 |
| Revenue | £163.30m | £187.10m | £181.10m | £520.20m | £681.10m |
| Net Income | £6.46m | £9.29m | £9.67m | £12.39m | £27.74m |
Despite the company having steadily grown, its shares are down over 18% from a year ago, and over 50% from its highs in 2021. Now, it’s trading at a trailing price-to-earnings (P/E) ratio of 6.08x, over 50% lower than the industry average of 9.2x.
The biggest risk to Brickability is how well the housing market can recover and the speed of housebuilding. Despite the desperate need to speed up the pace of housebuilding, political gridlock could keep the market depressed for longer.
However, I’m looking into Brickability for its great financials, low valuation, and secular demand.
Games Workshop
Games Workshop (LSE:GAW) is a board game company best known for its line of Warhammer. In the past six months, the stock has fallen over 12% as a result of macro concerns but is now recovering.
The company has consistently grown revenue and net income in the past four years, at a 16.3% and 19.61% CAGR respectively. Its dividend has grown from £1.25 per share to £4.70 per share, giving it a 4.75% dividend yield at the time of writing.
Games Workshop’s value comes from owning the IP to Warhammer, which it can easily scale to different platforms. From a board game in the 80s, it’s now being made as a movie by Amazon. In addition, it makes money from selling video games and merchandise.
The biggest risk to the stock is its relatively high P/E ratio, which trades at 23.36x. However, I believe it justifies this valuation because of its fast growth.
In the US, growth has soared almost 450% in the past 10 years and is still very underpenetrated. The success in other markets will likely keep growth high.
With the UK economy recovering and its financials and growth strong, Games Workshop seems attractive to me.
