The Motley Fool

Forget the FTSE 100! I reckon small-cap shares like this could make you rich

You may have heard of Haynes Publishing (LSE: HYNS). The company is responsible for those workshop manuals with lots of pictures that help you strip down and repair vehicles.

In years past, we could fix just about anything on a car with a Haynes manual beside us. But with the advance of technology, fewer things became fixable by keen amateur mechanics. Lift the bonnet of most cars these days and you are often confronted with an engine block that looks and feels like a sealed unit – daunting, to say the least!

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And a few years back, Haynes looked like it was on its last legs with a business that didn’t seem comfortable in the modern era. As an investment, I remember the firm didn’t look appealing to me at all.

A remarkable turnaround

However, Haynes staged a remarkable turnaround. In the words of the directors, the company has delivered a highly successful” strategic transition over the past five years moving from being an “iconic” manuals publishing business to being a “leading” supplier of content, data and innovative workflow solutions for the automotive industry and motorists.

Today’s half-year results for the period to 30 November demonstrate the point. Overall revenue rose by 4% compared to the equivalent period the year before. However, year-on-year revenue from digital operations moved 18% higher and now constitutes 60% of all revenue.

Operating cash flow is 17% higher and the net cash position on the balance sheet improved by a whopping 100% to £5.2m. There’s no doubt that the finances are in good shape. The firm has moved a long way from the days of paper manuals covered in oily fingerprints. Indeed, the sectoral section of the report reveals to us that around 90% of profits came from the professional market and just 10% came from consumers.

Stunning shareholder returns

You can see the progress in the record of trading. Revenue has been rising since 2016. Profits handbrake-turned in 2018 and have been shooting up since. Operating cash flow began ascending during 2017. If you’d bought shares in Haynes near the bottom of the trough on the chart in mid-2016, at today’s 416p, you’d be up almost 300%.

It seems clear to me that Haynes reinvented its business and rose phoenix-like from the ashes. However, I wouldn’t buy the shares today because in November, the firm announced that it was putting itself up for sale. My suspicion is that a takeover premium is now already baked into the share price.

However, I think the investing principle is a good one. If we can find down-on-their-luck companies emerging with a credible turnaround plan, we can often buy the shares before the shares shoot up when the plan starts working . Other good recent examples include FTSE 100 supermarket company Tesco and mid-cap leisure operator Rank. Choose well, and I reckon situations like this could help make you rich.

The high-calibre small-cap stock flying under the City’s radar

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Kevin Godbold owns shares in Rank Group but not in the other shares mentioned. The Motley Fool UK has recommended Tesco. 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.