With the City’s increasingly endangered sell-side analysts mostly focusing their efforts on large and mid-caps, there are plenty of stellar small-cap stocks out there just waiting for retail investors to discover with diligent research.
Providing services everyone needs
One such potential gem that’s currently covered by just two analysts is £190m market cap support services firm Marlowe (LSE: MRL). Since forming two years ago, the firm has exploded onto the scene thanks to an acquisition-heavy business model that has seen it hoover up 19 competitors offering support services such as installing and maintaining fire, water and air protection systems.
This had been a highly fragmented market with small players offering a few local clients only a single one of these services. Marlowe on the other hand has grown rapidly by bundling these services together to offer business customers lower rates while still improving its own margins by more efficient use of system engineers, as well as cutting out duplicate head office costs.
With revenue up 72% last year to £80.6m, EBITDA jumping 81% to £7.2m and a management team coming from highly successful roll-ups like Restore and Impellam, I don’t expect Marlowe to be an under-covered hidden gem for long.
Premiumisation pays off
I also expect big things from City Pub Group (LSE: CPC). It owns and runs 46 pubs focusing on higher quality food and drink for customers willing to pay extra for less corporate-feeling places in which they can spend some time. With its share price up over 20% since listing in late 2017, the company’s market cap has grown to £130m, yet it’s still only covered by just two analysts.
I reckon this will change in the near future as the company is growing quickly by both acquiring new pubs and increasing sales at its existing outlets. In the year to December, this two-pronged growth strategy saw revenue rise 35% to £37.4m thanks to like-for-like sales increasing 3.8% and the addition of new pubs.
Due to increasing benefits of scale, the group’s adjusted EBITDA rose 51% during the period to £6.1m. With a net cash position and proven ability to gin up increased sales out of its pubs, I expect further acquisitions to be made in the wealthy southern towns the company targets.
A hidden income and growth gem
With a market cap of just £54m, it’s not a surprise there’s only one analyst covering diversified financial Ramsdens (LSE: RFX). However, I reckon this may change going forward as the Northern-focused company grows where others fear to tread by offering customers pawnbroking, cheque cashing, jewellery retail and foreign exchange services from its growing estate.
In the year to March, the addition of a net four stores took its estate up to 131 stores, which together with positive growth in each of its four offerings and an increased focus on online sales led to revenue rising 16% to £39.9m. Meanwhile, increased scale boosted EBITDA by 31% to £7.9m.
And even after increasing its full-year dividend payouts from 1.3p to 6.6p year-on-year, rising profits meant the group ended the year with £12.7m in net cash. As a trusted name in a much maligned sector, I see plenty of potential for Ramsdens to use its financial firepower to continue taking market share and rewarding investors with both great income and capital appreciation.
Ian Pierce 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.