If you’re looking for big gains from the stock market, it can pay to look outside the FTSE 100. Just look at Fevertree Drinks whose share price has risen over 1,700% since the company listed on the stock market in late 2014 – try getting returns like that from the Footsie.
Today, I want to share with you two of my top small-cap ideas for 2019. In my view, both have the potential to generate big gains for investors.
K3 Capital (LSE: K3C) is a leading business sales and brokerage firm that acts for businesses valued between £50,000 and £100m. The £120m market-cap company has recently won a number of industry awards, including first place in the 2017 Thomson Reuters Small-Cap Financial Advisory Review.
It first came to my attention in January last year when the group released an excellent set of interim results and its share price shot up above 400p. Since then, the shares have drifted back to 275p, yet the group has continued to make significant progress (full-year revenue was up 53%), which leads me to believe that the stock could be set for another leg up in the near future if results this year are robust. It’s worth noting that in December, the company advised that it had achieved “significant revenue and profit growth” across its Knightsbridge and KBS Corporate brands, compared to the first half of the prior financial year, which suggests to me that this year’s results could be good.
With the stock currently trading on a trailing P/E ratio of 19.6, I think there’s plenty of upside potential here. And with a dividend that is growing rapidly (the yield is around 4%), I also think K3C could turn out to be a cash cow for investors.
The next small-cap stock that I think has strong potential is Gamma Communications (LSE: GAMA). Founded in 2001, the company provides voice, data and mobile services for the business market, and its clients include Pret, British Heart Foundation, and Cathay Pacific.
AIM-listed Gamma first listed there in late 2014 at a price of 187p, and since then, the stock has risen to 800p, valuing the company at £716m. Yet the company is generating strong growth at present, and the shares don’t look particularly expensive, which leads me to believe that there could be more share price gains to come in the near future.
Crunching the numbers, there’s a lot I like about the firm. Revenue and profits are trending up at a rapid rate, and return on capital employed (ROCE) – a key measure of profitability – is high, averaging 27% over the last five years. Furthermore, debt is negligible, meaning the company is less vulnerable in the event of an economic downturn. Half-year numbers, released in September, were excellent, with revenue up 18% and cash generated from operations surging 66%.
With the stock trading on a forward P/E ratio of 22.9, I think the outlook over the medium term is exciting.
Of course, smaller companies are more volatile than larger ones, meaning the risk of losing money is higher. Even the most promising smaller companies can experience setbacks and see their share prices fall significantly. Therefore, when investing in small-caps, it pays to diversify your money over a number of different picks, in order to lower your risk.
Edward Sheldon owns shares in K3 Capital. 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.