4 Brexit-proof small-caps with big growth potential

Roland Head explains why small caps Begbies Traynor Group plc (LON:BEG), Cape plc (LON:CIU), Gem Diamonds Limited (LON:GEMD) and Somero Enterprises, Inc. (LON:SOM) could deliver market-beating returns.

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If you’re concerned about the uncertain outlook for the UK economy, one solution is to focus your investments on businesses with minimal exposure to the UK. You might even focus on firms that stand to benefit if the economy goes south.

In today’s article I’m going to look at four small-cap stocks I believe offer investors attractive opportunities in the current market.

“Significantly stronger” trading

Somero Enterprises (LSE: SOM) makes equipment that’s used by construction firms to produce perfectly flat concrete floors for warehouses. Somero said today that trading in June was “significantly stronger” than both the previous month and the same period last year. Management now expects full-year results to be “slightly ahead of current market expectations”.

Most of Somero’s profits come from its home market of the USA. It’s also working hard to expand in China, where the high-spec floors produced by Somero’s equipment are relatively new.

Somero shares currently trade on about 9 times 2016 forecast earnings and offer a 3.5% forecast yield. The group has ample net cash and strong cash flow. I think further gains are likely.

Profits could rise in a recession

Shares of the UK’s largest insolvency practitioner, Begbies Traynor Group (LSE: BEG), fell sharply this morning after the group issued its annual results. Adjusted earnings per share of 3.2p were in line with expectations and the group’s dividend remained unchanged at 2.2p per share. But the company warned that “the market … remains difficult to predict”.

Begbies said today that insolvency volumes are currently at their lowest level since 2004. The group is depending on recent acquisitions to deliver profit growth this year.

Begbies’ shares are up slightly this year, but their 2016/17 forecast P/E of 11 and prospective yield of 4.6% still look cheap to me. I see Begbies as a growth buy and as insurance against a recession.

Weak pound could boost profits

Industrial services firm Cape (LSE: CIU) has been hit hard by the oil and mining downturns. Most of the firm’s clients are in these sectors. However, with trading and sentiment improving in the commodity sector, most of the bad news may already be reflected in Cape’s share price.

The group recently renewed its £300m credit facility until 2020, relieving some of my concerns about its £109m net debt. The weaker pound should also boost profit and cash flow. While Cape reports in pounds, much of the group’s business is priced in dollars.

Cape shares currently trade on 8.5 times forecast earnings for the current year and offer a 6.8% forecast dividend yield. Now could be a decent time to buy.

A diamond opportunity?

After a difficult 2015, the diamond market has recovered somewhat this year. However, shares in FTSE-listed Gem Diamonds Limited (LSE: GEMD) remain 27% lower than they were at the start of 2015. I believe this could be a buying opportunity.

Gem Diamonds had a cash balance of $60.6m at the end of March and is expected to report adjusted earnings of 24 cents per share 2016. This puts the firm’s stock on a forecast P/E of just 7, with a prospective yield of 3.4%.

This valuation seems overly cautious to me. I think Gem Diamonds could deliver decent returns from current levels.

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.

Roland Head 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.

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