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3 Small Caps I’d Buy Before Blinkx Plc: AFC Energy plc, Eco Animal Health Group Plc And M&C Saatchi Plc

Despite rising by 16% since the turn of the year, investor sentiment towards Blinkx (LSE: BLNX) remains somewhat lukewarm. After all, the company is going through a fast-changing period that is seeing it make multiple acquisitions, rebrandings and changes to its business model that, it believes, will turn its financial performance around. This is certainly needed, since Blinkx made a pre-tax loss of almost $25m last year, which is well down on its $17.6m pretax profit from a year earlier.

And, while I believe that Blinkx could prove to be an excellent buy for long-term investors – especially while it has a large cash pile and a price to book (P/B) ratio of just 0.8 – there are three small-cap stocks that I would buy ahead of it.

Profitability

A key reason why I’m more bullish on the likes of animal drug company, Eco Animal Health (LSE: EAH), and PR/advertising play, M&C Saatchi (LSE: SAA), is that they are highly profitable and have been for a number of years. Call me old-fashioned, but I give considerable weight to a strong track record of profitability and, with both stocks having had bottom lines in the black in each of the last four years, they appear to offer relative stability.

Furthermore, both Eco Animal Health and M&C Saatchi have excellent growth prospects. For example, over the next two years, Eco Animal Health is expected to grow its bottom line by 45%. That’s a stunning rate of growth and it could act as a clear catalyst on the company’s share price – especially when it trades on a price to earnings growth (PEG) ratio of just 1. Meanwhile, M&C Saatchi’s bottom line is forecast to rise by 27% over the same time period, with its PEG ratio of 1.3 indicating that it offers growth at a reasonable price, too.

Future Potential

Of course, past profitability is not everything. For example, alkaline fuel cell company, AFC Energy (LSE: AFC), has just swung into profit in its half year results and, looking ahead, has superb potential to tap into growing demand for cleaner fuels. And, with agreements already in place to generate $billions in revenue over the long term through multiple joint ventures, AFC appears to be a company with excellent long term growth potential. Certainly, it may trade on a P/B ratio of 13.6, but it could become a very profitable company over the medium to long term.

Looking Ahead

So, while Blinkx does have the financial means through which to rejuvenate its earnings profile and is a very cheap stock, Eco Animal Health, M&C Saatchi and AFC Energy appear to offer a more appealing risk/reward profile at the present time. Clearly, since all four companies being relatively small they are riskier than their larger counterparts, but they also offer excellent long term capital gain potential that makes them very enticing right now.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.