The Motley Fool

Two small-cap growth stocks for ambitious investors

Although small-cap stocks are considered riskier investments than their large-cap counterparts, they also often offer the potential for larger gains. This is because smaller companies tend to be more commonly mis-priced by the market due to behavioural biases and their perceived business risks, enabling investors to occasionally find some hidden gems.

If you’re looking for the next diamond in the rough, then consider these two under-the-radar picks.

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...

Market leader

First up is Strix Group (LSE: KETL), a company which designs and manufactures kettle safety controls, thermostats and water boiling elements for domestic appliances.

While many of us may never have heard of the company before, Strix is a worldwide market leader, supplying 38% of the global kettle market with its proprietary water temperature management sets. It’s not a particularly exciting, fast-growing industry, but Strix does appear to be finding healthy profits in a niche market.

For the six months to 30 June, the company generated revenues of £42.2m, with pre-tax profits of £10.3m — an increase of 9.6% on the £9.4m figure earned in the same period last year. Encouragingly, export sales have been particularly strong, with the firm gaining market share in emerging markets.

With growing scale and a widening lead over its competitors, Strix is well-placed to leverage its strong pricing power and improve on its already impressive first-half EBITDA margin of 33.6%. As such, investors should not only expect meaningful bottom-line growth going forward, but also some multiple expansion as well.

The company, which was founded in 1982, has only been listed on London’s Alternative Investment Market (AIM) since August this year. But despite the short span of time, investors who backed the 100p-a-share initial public offering (IPO) are already sitting on big gains, as the shares are now priced at 138p.

Still, I reckon further gains could still be to come as valuations remain undemanding. At its current share price of 138p, Strix is valued at less than 12 times its annual earnings and offers a prospective dividend yield of 5.1%.

Technology disruption

Elsewhere, Xeros Technology (LSE: XSG) is an exciting small cap-pick for investors looking to bet on innovative, environmentally-friendly technologies that have the potential to disrupt existing industries & practices.

Xeros’s patented polymer based technologies, which use less water and energy compared to conventional tech, is a potential game-changer in three world-scale industries: cleaning, tanning and textiles. A Xeros commercial laundry machine replaces water with millions of reusable polymer beads, reducing water use by up to 75% when compared to a traditional laundry machine.

The company is still some way away from delivering significant profits, as the firm today reported a widening in its H1 after-tax loss, to £15.1m, following a ramp-up in its commercialisation programme and higher research and development costs. On the upside, Xeros’s total installed estate of commercial cleaning machines increased by 36% to 378 machines, reflecting robust demand and growing acceptance of the technology.

Furthermore, Xeros plans to demonstrate its domestic machine prototype design at the Consumer Electronics Show in January next year, which would be a major boost to the company’s future expansion plans, as it would widen the potential applications of its tech to a much wider market.

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.

Jack Tang 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.