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2 secret small-cap stocks I think could be perfect ISA additions

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Thanks to their ability to grow at a faster clip, small-cap stocks have the potential to generate far better returns for investors than your typical FTSE 100 or FTSE 250 beast, particularly if they’re also held within a tax-efficient account like a Stocks and Shares ISA. Today, I’m looking at two relatively tiny stocks whose defensive qualities and recent positive momentum have caught my eye.

Not so toxic

I’d bet that most retail investors won’t have heard of £200m cap Augean (LSE: AUG). The AIM-listed, Wetherby-based business specialises in hazardous waste management — hardly the sexiest of line of work and unlikely to hit the radars of those searching for the next big tech play. When it comes to making money in the markets, however, what’s ugly/boring can often be very lucrative (see self-storage firms and pest control businesses).  

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Back in October, the company announced that strong trading over the third quarter would likely see adjusted pre-tax profit for 2019 come in “materially ahead” of previous market expectations of £16.5m. Today, it followed this up by stating that this encouraging performance had continued over Q4 and that the number would now be “at least in line” with analysts’ new predictions of £18.4m. 

Of course, all this good news hasn’t gone unnoticed by the market. Augean’s shares were already up a little over 50% since October before this morning, highlighting just how lucrative small-cap investing can be even over the short term. 

Although one might argue that the ‘easy money’ has already been made, I suspect there could be more gains to come for those willing to hold for the medium-to-long term, especially as the company still trades on a very reasonable 12 times expected FY20 earnings and has a market capitalisation of just £84m.

The only negative in all this is that Augean won’t appeal to those looking for income alongside growth as the company doesn’t currently pay out any of its earnings as dividends. 

Record profits

Another market minnow that’s hit my radar recently is 100 year-old elevator parts supplier Dewhurst (LSE: DWHT)

December’s results for the full-year to the end of September were certainly very positive with the company reporting record sales of £56.4m — up 23.4% from the previous financial year. Adjusted operating profit also broke records, coming in at £7.7m — up 28.3%.

Like most companies, Dewhurst’s management likely cheered the outcome of the General Election since it provides a bit more certainty on trading going forward. That’s not to say that the company is wholly dependent on the UK as it also has a presence in the US (a market it describes as “strong“), Australia (described as “steady“), plus Canada.

Like Augean, Dewhurst’s shares aren’t exactly pricey at the moment, despite making great gains over the last year (+54%). A forecast price-to-earnings ratio of 12 for FY20 looks good value, particularly given the defensive line of work the company operates in (I’m pretty sure a quicker method of moving between floors in a building is yet to be discovered!) and the fact that Dewhurst has no debt on its books.

There’s even a dividend. The anticipated 13.5p per share payout in the current financial year equates to a yield of 1.7%, hardly massive but still worth having. Holding Dewhurst’s stock within an ISA also means that holders won’t be taxed on this income either.

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Paul Summers 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.

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