If you’re looking for explosive, life-changing gains in the stock market, it can pay to invest in smaller companies. While smaller firms are generally riskier than larger well-known ones, they often grow at a faster pace, meaning that investors who are willing to accept the risks can pocket big gains.
With that in mind, here’s a look at two small-cap stocks I like the look of right now.
XP Power (LSE: XPP) is a leading developer and manufacturer of power controllers – the essential bit of hardware in every piece of electrical equipment that converts power from the electricity grid into the right form for the equipment to function. Headquartered in Singapore, the group serves a global customer base across a range of sectors from 29 locations in Europe, North America and Asia.
Over the last two years, XPP’s share price has surged 125%, turning £1,000 into £2,250. Can the stock continue to deliver big gains going forward? I think that it’s certainly possible.
Half-year results for the £690m market cap company, released this morning, looked strong. For the six months to 30 June, revenue climbed 16% (or 13% on a like-for-like, constant currency basis) on the same period last year, with adjusted profit before tax rising 17%. Adjusted diluted earnings per share came in at 83.7p, up 24% on last year. The company advised that the board expects full-year performance to be in line with existing expectations.
Looking at XPP’s financials, there’s a lot to like. Debt is low and return on equity is high, averaging 25% over the last five years. Revenue and profits are trending upwards at a healthy rate, and the group has an excellent track record of increasing its dividend, which indicates that the company looks out for its shareholders. Trading on a forward-looking P/E ratio of 20.4, I rate XP Power as a higher-risk ‘buy.’
Another small-cap stock I hold in high regard (I own the stock myself) is K3 Capital (LSE: K3C). It’s a leading business sales and brokerage firm that acts for businesses valued at between £50,000 and £100m. The group has recently won a number of awards, including first place in the FY2017 Thomson Reuters Small-Cap Financial Advisory Review, after completing 35% more transactions than any other advisor in the UK.
This is a company that is growing quickly and over the last three years, revenue has surged from £2.9m to £10.8m, an increase of 270%. And unlike many other companies of its size (its market cap is just £124m), it’s already a highly-profitable business.
A positive announcement in June saw the company advising that trading for the full year ended 31 May is expected to be “comfortably in line” with market expectations (revenue of £16.2m is forecast) and that the group had achieved “significant” revenue and profit growth across its three divisions. But despite this, the shares have pulled back recently, after a strong rise earlier in the year.
As a result, I think they could now be worth a closer look. With analysts expecting earnings of 13.5p per share for last year, the estimated trailing P/E ratio is just 21.3, which looks very reasonable to my mind, given the rate at which the company is growing.
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Edward Sheldon owns shares in K3 Capital. The Motley Fool UK has recommended XP Power. 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.