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Two ‘hidden’ small-cap stocks offering growth and value

Shares in AIM-listed software company Elecosoft (LSE: ELCO) have surged today after the company told the market that its profit almost doubled in the first half of 2017. 

The small-cap announced this morning that revenue for the half that ended June 30 rose 14% to £10m from £8.8m while pre-tax profit jumped to £1m from £557,000. The bulk of this growth came from Integrated Computing & Office Networking Ltd, acquired in October 2016. It contributed £419,000 in revenue to the results for the first half. 

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Off the back of these impressive figures, management has decided to declare a dividend of 0.2p per share, up a third from last year’s payout giving a dividend yield of 0.4%. 

And it looks as if Elecosoft is on track to continue its impressive performance. In a statement alongside the results, Executive Chairman, John Ketteley said: “Elecosoft delivered a positive performance in the first six months of 2017, with growth in all our geographic regions…We have also made an excellent start to the second half of the year.”

Pushing ahead

Small-cap tech companies like Elecosoft are risky investments, as competition is fierce and plenty of cash is required to grab market share. However, it seems as if this firm has cracked the code. Cash generated from operations during the first half was £2.3m, more than enough to cover capital spending and meet debt obligations. At the end of the period, cash on the balance sheet amounted to £3.5m, compared to debts of around £2.8m

As well as a strong balance sheet, this small-cap tech company is projected to grow earnings per share by 29% for 2017 and then 27% for 2018, according to City analysts. These forecasts look impressive and imply that the shares are trading at an attractive 19.7 times forward earnings, a relatively low valuation considering the company’s cash balance and growth potential. 

Under the radar 

James Latham (LSE: LTHM) is another small-cap that flies under the radar of most investors even though shares in the company have gained 223% over the past five years excluding dividends.

Growth at the timber and panel products distributor is expected to slow over the next two years, with analysts predicting little to no earnings growth. Nonetheless, I believe that this slowdown is temporary. James Latham’s management is working hard to turn the business around by cutting costs and improving margins.

Over the past five years, pre-tax profit has almost doubled as management has successfully expanded the business, and I believe that the exec team can continue to produce returns for investors after this period of stagnation. 

The one downside is that the shares are slightly expensive, trading at a forward P/E of 16.7 even with no growth expected during the next two years. Still, the dividend yield of 1.8% looks attractive and is covered more than twice by earnings per share, leaving plenty of room for payout growth. 

10 steps to a million

Fast-growing small-caps like Eleco can make you rich but you really need to do your research before buying. Failing to do so can cost you thousands. 

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Rupert Hargreaves owns no share 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.