The Motley Fool

2 small-cap dividend stocks that could be millionaire-makers

Finding undervalued small-cap stocks isn’t easy in today’s strong market conditions. But I’ve identified two which I think could deliver significant gains for investors.

The first of these is data analytics software group Oxford Metrics (LSE: OMG). The firm’s shares rose by 7% on Thursday, after it announced that adjusted pre-tax profit for the year ended 30 September is expected to be “slightly ahead of market expectations”.

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...

Broker forecasts previously were for earnings of 2.3p per share for the year. In my view, the wording of Thursday’s update suggests that the final figure could be 5%-10% higher than this — perhaps 2.4p-2.5p.

That would still leave the shares looking fairly pricey, on around 25 times forecast earnings. But the company is expected to deliver substantial further gains in 2018. Recent forecasts suggest that earnings per share could rise by as much as 50% to 3.5p next year. That would give the shares a more reasonable P/E of 18.

Just another expensive tech stock?

Valuations for some tech stocks have become pretty steep in recent months. But in my view, Oxford Metrics’ fundamental quality suggests its valuation might be justified.

The first point to note is that it’s highly profitable and generates plenty of cash. The group’s operating margin was 18% last year, while return on capital employed (ROCE) — a key measure of profitability — was about 16%. Both figures are well above average.

Today’s trading update also suggests that Oxford Metrics has continued to generate strong free cash flow this year. Net cash for the year just ended was £9.8m, up from £8.3m the previous year.

High profitability and strong cash generation provide good support for the group’s dividend. This payout has grown by an average of 27% since 2011, and now offers a forecast yield of 1.7%. I plan to continue holding my shares following today’s gains.

A high-yield alternative

If you’re looking for small-cap stocks with a high dividend yield, you might want to consider spread-betting and stockbroking firm CMC Markets (LSE: CMCX). Its shares halved in value last year, when the FSA announced plans to limit the amount of leverage that could be offered to retail customers.

We don’t yet know what form these new rules will take. But in its latest trading statement, CMC emphasised its focus “high-value, experienced clients”, whose activity may be less affected by any changes to the rules. The group is also continuing its expansion into stockbroking through a partnership with one of Australia’s largest banks.

According to a recent trading statement, half-year profits are expected to be “significantly higher” than for the same period last year. The market has certainly regained its confidence in the business, as the shares have now risen by more than 50% from last year’s lows.

Is this view correct? It’s too soon to say. In the firm’s H1 trading statement, management warned that it “remains cautious about the future outlook given the ongoing regulatory uncertainty”.

However, the shares now trade on a 2017/18 forecast P/E of 12.5, with a prospective yield of 4.5%. In my view this is probably cheap enough to discount the risk from regulatory changes. I’d continue to hold.

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.

Roland Head owns shares of Oxford Metrics. 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.