While share prices have generally risen in the last few months, a number of companies continue to trade on relatively enticing valuations. In many cases, this is due to their uncertain futures and cyclical business models. As such, there could be volatility ahead for their investors. However, buying such stocks now could also lead to strong total returns in future years. Here are two small-caps which could be worth buying right now.
The outlook for automotive retailers such as Motorpoint (LSE: MOTR) is relatively uncertain. Brexit has caused sterling to depreciate, which means inflation is now moving higher. It has reached 2.3% and is forecast to increase over the coming months. As a result, consumer spending could come under pressure, and the affordability of larger items such as cars may decline.
Due to this, Motorpoint’s valuation remains exceptionally low. It trades on a price-to-earnings (P/E) ratio of only 11.6 and yet is forecast to record a rise in its bottom line of 28% in the current year, followed by growth of 13% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.6, which indicates that it offers a wide margin of safety.
Motorpoint has a dividend yield of 3.8% from a payout which is covered almost three times by profit. Taking into account its highly affordable dividend and its rapidly rising earnings, the company’s income potential seems high. Certainly, its forecasts could be downgraded and the UK economy could experience a challenging period. But, for long-term investors it seems to be a very favourable investment opportunity from both an income, growth and value perspective.
Motorpoint is not the only cyclical company which remains cheap. Online travel agent On The Beach (LSE: OTB) continues to trade on a relatively low valuation despite its share price rising by 57% in the last six months. For example, it has a PEG ratio of 0.6 thanks to upbeat earnings growth potential.
In fact, over the next two years it is forecast to increase its bottom line by a total of 64%. Given the uncertain outlook for the UK and global economies, that would be a stunning result. It shows that the company’s current strategy appears to be working well, and in more prosperous and less uncertain economic times it could deliver an even stronger rate of growth.
On The Beach’s outlook shows that the company may be more resilient than the market currently anticipates. Clearly, it is a cyclical stock, but consumers may choose to prioritise an annual holiday over other discretionary items. This may make the wider travel & leisure sector more robust than many investors currently realise.
Given the high valuations which are commonplace elsewhere with the FTSE 100 near an all-time high, On The Beach appears to offer a potent mix of high growth potential and a low valuation. Therefore, now could be the right time to buy it.
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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.