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Neil Woodford just bought a small-cap stock you’ve likely never heard of

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Neil Woodford is a portfolio manager that is not afraid to stray from the herd. Whereas most income fund portfolio managers generally prefer to invest in mainstream high-yielding FTSE 350 stocks, a glance at the portfolio holdings of both Woodford’s Income Focus and Equity Income funds reveal that the portfolio manager holds many smaller companies. Here’s a look at one of his latest buys.

GYG an income portfolion addition?

In July, Woodford added £63m market cap GYG plc (LSE: GYG) to his Income Focus portfolio. A £63m market cap small-cap stock for an income portfolio? You heard right.

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GYG is a provider of painting and maintenance services to the superyacht industry. Woodford stated in his July portfolio update: “It is a cash generative business, which is expected to pay an attractive dividend and support a progressive dividend policy going forward.”

The superyacht specialist today released its first set of interim results, since coming to the market in early July. How do the numbers look? In my view, they paint a mixed picture. While group revenue increased 19.4% to €33.9m, the company generated an operating loss of €1m, due to €3.2m of exceptional items mainly related to the IPO. The group’s net cash balance fell to €4.7m, from €6.2m six months earlier. Chief executive Remy Milliott commented: “The Board remains confident about the future as we enter our busy post-summer season.”

There’s several things I like about this business. The company currently has a 17% market share of the superyacht refit market and services 25 out of the 50 largest superyachts. According to GYG, superyachts require a major survey service every five years to comply with class, maritime and insurance requirements. Yacht owners typically undertake annual maintenance as well to keep their vessels in optimum condition. As a result, recurring revenues should be strong. City analysts expect GYG to reward shareholders with dividends of 2.8p and 5.8p this year and next, yields of 2.1% and 4.3%, respectively.

Having said that, while GYG looks to have potential for both capital growth and dividends going forward, personally I’d wait for the company to be profitable before investing.

Equitini growth to come?

One Woodford small-cap I would buy today is investor services specialist Equiniti (LSE: EQN). I last covered the stock almost a year ago, when it was trading near the 200p mark, however, since then the shares have risen over 40% to now trade just below 290p. Despite the gain, I believe there could be more share price growth to come.

The company appears to have strong momentum at present, recently winning new clients such as Aon Hewitt and House of Fraser, and boasting an impressive 100% client retention with new client wins across all divisions.

Furthermore, the group recently announced a deal to acquire the share registration business of US bank Wells Fargo for £176m. Equiniti believes the acquisition has “compelling strategic rationale” and should be “strongly earnings accretive in the first full year of ownership.” If the deal is approved by shareholders at the company’s general meeting scheduled for later this week, Equiniti will become the third largest share registrar in the US and a key multinational player.

Trading on forward looking P/E ratio of 18.1, Equiniti isn’t the cheapest small-cap around, however, given the company’s growth potential, I believe the valuation looks reasonable.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of Equiniti. 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.

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