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These cheap small-cap stocks could help you retire early

Should retirement investing concentrate on big and boring dividend payers? When you get close to hanging up your work boots, I’d say probably yes. But in the earlier decades of a life-long investment plan, you can benefit from smaller shares and growth stocks, and you can easily accommodate a bit of higher risk.

Risky insurance?

Take Novae Group (LSE: NVA). It’s a lot smaller than the big players, with a market cap of under £400m. And its in a more risky sector of the business, as a specialist Lloyd’s insurance firm. 

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Novae slashed its 2016 dividend after the Ogden discount rate was heavily cut — the effect of which is that people suffering serious injuries will receive significantly higher compensation payments. That has a knock-on effect across much of Novae’s business, slashing pre-tax profit for last year by 60%.

But being small also means being agile, and a Q1 trading update on Wednesday showed that the firm’s “withdrawal from certain casualty classes where we deem future profitability to be unsustainable” is already having a positive effect. Gross written premiums rose by 13.8% over the first quarter of last year, and though an investment return of 0.7% is down, it’s ahead of expectations at this stage.

Forecasts are suggesting a fairly speedy recovery, with EPS rises of 17% this year and 33% next, putting the shares on PEG ratings of 0.9 and 0.4 respectively — an attractive growth rating. The dividend should be coming back too, and though we’re only looking at yields of 2.6% to 2.7%, they’d be well covered by earnings and we should be seeing further progress in the coming years.

I see a strong future for Novae after its speedy reaction to the Ogden rate cut. At 619p the share price is down 26% since the news broke, and I reckon that’s oversold — I see an attractive long-term buy here.

Oil profits

My other pick, Cape (LSE: CIU), is a very different company. It’s in the oil and energy services business, and the falling prices that have assailed the sector have hurt and have kept the share price depressed. Earnings have been a bit erratic and are expected to remain pretty much flat for another couple of years, and the dividend was cut in half in 2016.

So why do I see Cape as a tasty buy right now?

It’s because the shares just look too cheap to me, on forward P/E multiples of under eight and with a dividend of around 3%, that pretty much matches the FTSE 100 average.

An update on Wednesday told of “a strong trading performance in the first quarter, largely driven by increased project volumes and excellent operational performance in the Asia Pacific region“. And though the firm says the North Sea and its coal sectors are still challenging, its order book looks good and UK margins are expected to improve.

Debt can be a problem with smaller companies in this sector, but Cape’s adjusted net debt actually fell in 2016, to £80.4m at the end of December. For a firm with a market cap of around £300m and revenues approaching £900m, I really don’t see a problem there.

The share price has picked up quite nicely since November, but at around the 240p level today I’m still seeing a long-term bargain on a short-term buying opportunity.

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Alan Oscroft 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.