Smaller companies are generally riskier than their larger counterparts. In many cases, they lack the diversity and financial strength of FTSE 100 stocks. This means that the loss of a customer or difficult trading conditions in one local area can cause their financial performance and share price to deteriorate rapidly.
However, with higher risks can come higher rewards. Smaller companies have historically outperformed their larger peers in the long term. With that in mind, it could be worth buying these two small-caps for the long run.
Reporting on Monday was LED lighting technology specialist Dialight (LSE: DIA). The company announced its CEO has stepped down with immediate effect after its recent product delivery performance proved significantly disappointing. It states that the new CEO, Martin Rapp, has prior experience in the sector, and that it may be possible for him to help lead the business through its current difficulties.
In terms of trading, Dialight expects its revenue and EBIT (earnings before interest and tax) to be £181m and £9.7m, respectively, for the year to 31 December 2017. It continues to expect a second-half weighting for the company’s trading performance in 2018. It remains confident in its long-term growth prospects and in the sustainability benefits of its products for customers.
With the stock forecast to deliver a rise in its bottom line of 76% in the current financial year, it appears to have a bright future. Certainly, there is scope for this figure to be downgraded significantly, but with the company’s shares trading on a price-to-earnings growth (PEG) ratio of just 0.2, they seem to offer a wide margin of safety. Therefore, while potentially risky, Dialight could offer high rewards in the long term.
Also updating the market on Monday was industrial fuel cell power company AFC Energy (LSE: AFC). It announced that it has completed the successful development and operational validation of the enhanced fuel cell stack and cartridge. It incorporates a number of design enhancements initiated over the last year and claims it exhibits significant progress in terms of longevity, availability, cost and efficiency measures.
Encouragingly, the results achieved thus far from operating the fuel cell provide outputs which closely match the results observed from months of extensive computational simulation.
Additionally, the latest electrode pairings that were tested during December show extended operational life for the fuel cell electrodes. They “significantly exceed” the longevity targets set for 2017. There is now a plan to undertake ongoing testing work for delivery of an electrode pairing that will achieve a four-year operational life.
Following its update, the AFC Energy share price has risen 6%. Although the stock remains highly volatile and risky, the growth potential for cleaner forms of energy remains high. As such, while it should only form part of a diversified portfolio, it could generate exceptionally high returns in the long run if it’s able to continue with the progress made in recent months.
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Peter Stephens owns shares in AFC Energy. 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.