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2 small caps that could double in 2017

Today I’m looking at two small caps whose shares are on the move today after trading updates. Both companies have seen big falls over the last year, but could deliver significant gains if trading continues to improve.

A new beginning?

Support services group Lakehouse (LSE: LAKE) has risen by 7% so far today, after the group announced a solid set of underlying financial results for the year ending 30 September.

It reported an underlying pre-tax profit of £9.9m and underlying revenue of £305.8m for last year. This equates to underlying earnings per share of 5.2p, which puts the stock on a trailing P/E of about 7.

The group’s dividend has been cut as I expected, but not abandoned. Lakehouse will pay a final dividend of 0.5p per share, giving a total payout of 1.5p and a trailing yield of 4.1%.

The group’s order book currently stands at £543m, down by around 10% from £595m at this point last year. However, forward visibility of revenue for the current year was 87% in November, above last year’s like-for-like comparison of 77%.

Before today’s announcement, the firm’s house broker was forecasting adjusted earnings of 8.7p per share for the 2016/17 financial year, with a dividend of 3.1p per share.

These forecasts may change after today’s results, but if they’re correct then Lakehouse trades on a forecast P/E of 4.2 with a prospective yield of 8.5%. If the company can deliver on these forecasts, then I’d expect the shares to double.

However, significant uncertainty remains, and debt has risen as a result of recent acquisitions. I’d want to do further research before deciding whether to invest.

A smoking recovery?

Smoke alarm manufacturer Sprue Aegis (LSE: SPRP) had a grim 2016, with the shares losing half their value after a series of problems and profit warnings.

Things seem to be getting back on track. In a trading update today, the company said it expects to report full-year sales of £57.1m for 2016, in line with consensus forecasts of £58m.

Adjusted operating profit is expected to be £2.1m, which looks about right to me, against forecasts for adjusted (post-tax) earnings of £1.12m.

Sprue’s recovery appears to have been driven by the German market, where new rules have triggered a surge in demand for smoke alarms. The firm said that German sales rose by 52% last year after a new range of products — which had been delayed — went on sale. Sprue expects Germany to remain a significant growth market over the coming years.

However, the company did warn that costs have risen significantly since the EU referendum, as a result of sterling’s weakness against the dollar. Most of the group’s manufacturing costs are in dollars.

Sprue ended last year with net cash of £14.3m and no debt. This suggests to me that the group’s dividend of 8p per share will be maintained, giving the stock a forecast yield of 4.6%.

However, at 173p, the shares look expensive when measured against 2016 forecast earnings of 4.2p per share. In my opinion, the company’s investment appeal depends on whether it can hit broker forecasts for earnings of 11p per share in 2017. For now, I rate Sprue as a hold.

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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.