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2 top small-cap stocks I’d buy in December

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ScS Group (LSE: SCS) has suffered from the Brexit-led pressure on housebuilders and on retail in general — we’re really not in an ideal economic state for people to be rushing out and buying new furniture and floorings.

But I’m a firm believer in looking for bargains in sectors when they’re in a cyclical or economic downturn, which is when share prices tend to be lower, than when things are going swimmingly well and shares are expensive. And I think I’m seeing that with ScS.

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The dividend is perhaps the most obvious attraction, with a yield of around 8.5% forecast for this year and next. One possible downside is that it wouldn’t be that well covered at around 1.6 times — but we’re looking at a retail operation here and not a company with massive capital reinvestment needed every year for growth.

Cheap shares

The shares are also on a P/E of under eight, which seems low. And I see a very good chance of a re-rating within the medium term, and those who buy now could lock in a very nice effective dividend yield and also enjoy some capital gains.

At full-year results time, ScS reported cash of £40.1m and no debt, so there’s no pressure on that front, and the dividend was actually lifted slightly to 9.8p per share, with the company expressing confidence in its outlook.

And at its AGM Wednesday, the company revealed a 2.9% increase in like-for-like order intake for the 16 weeks to 18 November, together with “two-year like-for-like orders up 8%.

ScS also reckons it should be able to take advantage of opportunities in the uncertain economic climate, and it appears to have the liquidity to do so.

Medical prospect

Integrated Diagnostics Holdings (LSE: IDHC) has given investors a rocky ride over the past few years, and its share price is down from flotation in May 2015. But the long share price slide started to turn around this year, and from a low in February we’ve seen an 80% rise to today’s $4.25. 

The firm, which provides medical diagnostics services in Egypt, Jordan and Sudan, released a third-quarter update on Wednesday, telling of a 30% rise in revenue for the nine months, including a 41% spike in Q3. And apparently, “revenues and patient volumes accelerated meaningfully in the months that followed the holy month [of Ramadan] and subsequent holiday feast“.

CEO Dr Hend El-Sherbini said that the results “point toward the close of another strong operational and financial year for the group.”

At the moment it’s hard to put much meaning on ratios as the firm is still very much in its early growth phase, though we’re looking at a forward P/E ratio of around 30. But there is a maiden dividend predicted for the current year, which is encouraging, together with a couple of years of strong earnings per share growth.

Of course, the company’s location is a big factor, with Egypt being its biggest market. That country’s economy has been troubled, though Wednesday’s update did tell us there are signs that it is “turning the economic corner” and reckoned that the firm has strength through its brand equity, solid supplier relationships, and asset-light model.

Like all growth candidates in their early stages, this is risky, but I think it has attractive potential.

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Alan Oscroft has no position in any of the 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.

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