The Motley Fool

Two high-growth small-caps I’d buy to retire on

Small-cap investing can be a bit of a hit or miss venture, but I believe looking to smaller stocks that are less frequently covered by analysts can unearth some great companies whose shares trade at bargain prices while offering phenomenal long-term capital appreciation prospects. And I think I’ve discovered two such under-the-radar options in speciality electronics manufacturer Acal (LSE: ACL) and chemicals producer Treatt (LSE: TET).

Exploiting its niche with aplomb 

Acal started out as a pure distributor of speciality electronics for customers in sectors as varied as photonics, communications, magnetics and sensors. But after years of serving as a go-between for manufacturers and customers, it realised there were gaps in the market that it could fill with its own products.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

And thus the company’s design and manufacturing (D&M) segment was born. This part of the business now accounts for over half of all sales and is growing at a rapid clip through organic expansion and acquisitions. In the year to March, sales from this division grew 28% year-on-year (y/y) to £175.6m and accounted for over 80% of the group’s £20m in underlying operating profit. On top of growing faster than group overage, operating margins of 11.5% last year were more than triple that of the distribution side of the business.

Now, the distribution business still has a role to play in gathering market intelligence, providing a reliable sales outlet for the groups in-house products and increasing cross-selling from its myriad manufacturing companies.

And for investors like myself who prefer their small-caps profitable and with a healthy balance sheet, its relatively small £30m in net debt presents a very manageable sum. With a great record of organic and acquisition-led growth, rising margins and a respectable 2.8% dividend yield, I believe Acal is a great business trading at a very reasonable valuation of 13.7 times forward earnings.

Growth with a citrus flavour 

Another great small cap operating in a niche sector is Treatt, which produces ingredients for everything from scented oil for shower gels and shampoos to flavouring for juices, teas and sodas. The company has done particularly well of late thanks to increased consumer demand for the natural ingredients and citrus flavours it can produce, which helped boost revenue by 27% y/y in the half to March.

While a large part of this gain was due to the weak pound, the fact that H1 operating profits outpaced sales growth at 59% to hit £5.9m should be particularly welcomed by investors. This suggests the company’s plan to move up the value chain is paying benefits as it emphasises sales of higher margin products.

Looking ahead, growth prospects for the firm are quite impressive thanks to consumer habits, expansion into China proceeding well, and its US business growing so popular that is has reached capacity at its facility there. And with net debt of just £8m, the firm is well positioned financially to support expansion across the business.

However, the company’s share price has increased over 175% in the past year and is now valued very highly at 25.6 times forward earnings. I like Treatt’s business, but this is simply too expensive compared to its historic valuations to make me comfortable buying shares today.  

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Ian Pierce 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.