The Motley Fool

2 small-cap stocks I’d buy right now

Advanced Medical Solutions (LSE: AMS) has a portfolio of market-leading wound care and closure products and has delivered enviable returns for shareholders. The small-cap’s sales have nearly doubled in the last five years, with operating profit rising nearly threefold and the share price more than doubling in the same period.

The company’s most important product range is Liquiband, the dominant glue guns in accident and emergency departments in the UK and many European countries.

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It has also designed a wound care dressing range with the cash-strapped NHS in mind, called Activheal. This has been proven as efficient as the most popular product currently in use, but is 25% cheaper. This targeted approach is clearly working. The range now commands a 7% market share and should continue to take more. 

You’d expect serious competition in the wound care niche but the company’s incredible 24.8% operating profit margin backs up claims of market leadership.

The company might look a little expensive at first glance, trading on a P/E of 32, or 24 times last year’s free cash flow but its products are strong and the company is debt-free.  If you discount the £41m cash-pile from the market-cap, the company trades on only 17 times next year’s earnings.

The Liquiband brand seems to have potential in China and the company continues to expand multiple ranges in the US. Meanwhile a strategic diversification into the operating room could squeeze further cash out of already-established intellectual property for little research and development cost. I believe these massive opportunities, combined with the company’s wonderful strategic execution, are worth paying up for.

Don’t be a sheep

AMS has the potential to double its share price from here, but if you’re looking for a more racy (albeit more speculative) growth investment, I recommend you turn your gaze towards Bioventix (LSE: BVXP). This is a little-known small-cap specialising in the creation of monoclonal antibodies derived from sheep.

Antibodies are the proteins that keep you safe by responding to foreign substances in the body. Bioventix specialises in creating these antibodies for use in the immunodiagnostic and drug testing spheres. The company claims its sheep-derived antibodies are more useful than those created through traditional methods.

I’m no scientist, but the company’s figures seem to back up the claim of a unique competitive advantage. Bioventix increased revenue from £2m in 2011 to £5.5m last year, but what I find really attractive is the impressive profitability on show. The company’s net income margin has been above 50% every year since 2012. Last year it was 63.3%. That’s truly remarkable and implies the firm is creating something indispensable. Returns on equity are unsurprisingly high, coming in at 47.2% last year.

Like AMS, the company is debt-free, with a cash pile of £5.3m. Also like AMS, the company is priced at a premium. Its market cap is currently around £79m, or 22 times last year’s earnings. Given the wonderful returns on equity, growth record and seemingly unique product, I believe Bioventix could be worth a flutter. However, I’m not an expert on monoclonal antibodies (and suspect I never will be). Therefore, I’ll likely never have a solid grip on the company’s competitive position.

A less speculative opportunity

Unless you keep up with the science and appreciate its place in the industry, I'd avoid allocating a large percentage to this fast-growing science firm. If you're looking for a small-cap growth story you can be a bit more bold with, I recommend you download an investment report written by one of our top analysts.

It reveals a company run by an operations-savvy, value-focused founding management team and trades on a meagre forward P/E of seven. The company looks set to continue its expansion and we believe its recurring revenue streams should be valued 44% higher than it is today. Click here to download the report, free of obligation.

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