2 forgotten small-caps with growth potential

While share prices have generally risen in recent months, some companies remain under the investment radars of many investors. This could be for a variety of reasons, including other companies in the same sector having offered superior prospects in the past. Such ‘forgotten’ companies could therefore offer relatively wide margins of safety, which could translate into favourable risk/reward ratios for investors. Here are two small-caps which could fall into that category.

Growth potential

Reporting on Friday was gold producer Trans-Siberian Gold (LSE: TSG). The company reported results for the 2016 financial year. They showed a small rise in revenue of 2.5%, with profit before tax increasing by 32%. Much of this rise was because of an increase in the price of gold. It experienced a rise from $1,146 per ounce to $1,248. However, the company was also able to reduce its cash costs to $426 per ounce from $473 in the previous year. This shows that it is becoming more efficient, which could help to improve its future profitability.

As well as improving profitability, Trans-Siberian Gold also paid its maiden dividend. This equates to a dividend yield of over 10%, although the payout was classed as a special dividend. This means there is no guarantee of further payments in future, although it signifies that the business has sufficient cash through which to invest for future growth.

Looking ahead, the gold price could perform relatively well. The world economy faces an uncertain period, and inflationary forces appear to be relatively robust. This could increase investor demand for the precious metal and cause a further rise in the gold price. This would be positive news for the firm and, while it remains a relatively risky small-cap stock, its high return potential could make it a shrewd buy.

Growth potential

Also offering investment potential within the mining sector is Gem Diamonds (LSE: GEMD). The diamond producer has experienced a somewhat mixed recent period in terms of profitability. In the last five years, its bottom line has increased at a double-digit pace at times, but likewise has also deteriorated sharply in other years. Of course, this has been an uncertain period for the wider sector, with volatility in commodity prices and profitability likely to continue over the medium term.

Therefore, it may be prudent for investors in the industry to seek wide margins of safety before buying. This is in case there are downgrades to forecast growth rates.

Gem Diamonds appears to offer a significant discount to its intrinsic value. It is forecast to report a rise in earnings of 249% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it offers growth at a reasonable price. Clearly, further volatility could be ahead, but with a sound strategy and low valuation, it could prove to be a profitable investment over the long term.

Millionaire potential

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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.