One thing I often stress is that it can pay to look outside the FTSE 100 index if you’re looking to generate strong returns from the stock market. Small-cap value stocks, in particular, can be worth including in a portfolio, as research has shown that this category of stocks tends to generate excellent returns over the long term.
Today, I’m looking at two small-cap value stocks that I believe have the potential to deliver strong long-term returns for investors.
Liontrust Asset Management
Liontrust (LSE: LIO) is an independent asset manager based in London. The group runs a range of ‘specialist’ investment funds and has a particular focus on sustainable investing, which is a huge growth area. Earlier in the year, I actually listed the company as one of my top small-cap picks for 2018 when it was trading around 490p. Since then, it’s risen 30%, which is an excellent return given the market weakness we’ve seen in 2018. Yet looking at the group’s recent performance, I think there could be more upside to come.
Half-year results released this morning show that Liontrust has considerable momentum at present. For the six months to 30 September, net inflows were up 306% to £723m, which helped push adjusted profit before tax up 21% to £14.5m and enabled management to lift the interim dividend by 40% to 7p per share. Chief Executive John Ions was upbeat in his assessment of the group’s outlook, stating that he has “great confidence” about the future growth of the firm.
For the full year, City analysts currently expect Liontrust to generate earnings of 47.1p per share which at today’s share price equates to a forward P/E of just 13.6. I believe that’s a very reasonable price for a niche company with momentum, and a prospective dividend payout of 24.2p (a yield of around 3.8%) adds weight to the investment case. Given the attractive valuation and the growth story associated with sustainable investing, I see Liontrust as an ideal smaller company to buy and hold for the next decade.
Impax Asset Management
Another smaller asset manager in the sustainable investing space that I believe offers investment appeal right now is Impax (LSE: IPX). The group has a long history of investing in opportunities that have arisen from a transition to a more sustainable economy and has won awards for its sustainable investing in the past. Like Liontrust, the asset manager looks well placed to continue attracting capital as investors become more aware of the benefits of this investing style.
Impax is expected to report its full-year results for the year ended 30 September in the next few weeks, and if City analysts’ forecasts are on the money, the results should be good. Currently, analysts expect the group to generate earnings per share of 13.3p (up 115% on last year) and pay out 4.4p in dividends (up 52% on the last year). While there’s no guarantee that these forecasts will be accurate, it’s worth noting that Impax’s half-year results in June were excellent.
Impax shares are up over 25% this year but I believe there’s more to come from this firm over the long term. On a forecast P/E of 15.8, the shares remain good value, to my mind.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Liontrust Asset Management. 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.