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2 bargain small-cap stocks I’ve been buying for my ISA

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Scared you’ve missed the market recovery boat? Don’t panic — I think there are still a few quality stocks available at great prices. Here, for example, are two from lower down the market spectrum that I’ve been buying for my ISA this month. They’re certainly not risk-free, but the rewards could worth waiting for. 

ISA buy

My first ISA purchase has been a small stake in small-cap ceramic tableware manufacturer and distributor Churchill China (LSE: CHH).

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At first sight, this might seem a very odd move. After all, the company’s biggest customers are pubs, restaurants and hotels — the very places that have been closed for months. And yes, even if the government allows some of these sites to open in late June, trading could be very tough for quite a while.

Nevertheless, I still think quite a lot of this is priced in. The share price is, after all, still down 40% from the highs hit at the start of the year. If you believe current estimates, this leaves Churchill trading on 13 times forecast earnings. That’s cheap relative to its five-year average of a little under 19.

Second, this firm has shown all the hallmarks of a quality business, namely fat margins and decent (and rising) returns on capital employed. It’s also got a sound balance sheet with net cash of £15.6m in April. 

Third, a large proportion of the company is still owned by the Roper family. That’s something I really like to see because it implies their interests will always be aligned with those of your typical retail investor. Another tick in the box.

Let’s be clear on this: Churchill’s 2020 numbers will likely be very poor and the shares could fall again when it next reports to the market.

As a medium-to-long-term recovery play, however, I’m cautiously optimistic that the margin of safety is now sufficient to begin investing.

Sometimes, you just have to press the buy button.  

Cost-cutting

A second market minnow I’ve been buying for my ISA in June has been laser-guided equipment manufacturer Somero Enterprises (LSE: SOM). Fortunately, this purchase went through before the recent trading update that saw the shares rise almost 4.3% on the day. 

In response to uncertainty over how long the coronavirus will be with us and what impact it will have on business, Somero announced another range of cost-cutting measures last week, designed to save around $5m. Roughly 20% of its staff have been furloughed and all bonus-related pay has been cancelled. Capital expenditure has also been reduced further, although product development is still ongoing. 

That’s not to say the small-cap is in financial distress. Management believes the company will have $24m in net cash at the end of this month. And while current revenues are already 25% below the $90m originally targeted by analysts in 2020, they reckon it will still be cash generative if they tumble another 20% from here.

Naturally, no one knows what happens next with Covid-19. Like Churchill, there’s always a chance the stock could fall in value. With its focus on construction projects, Somero is also undeniably cyclical, which explains why the market has long been reluctant to slap a high price on its shares. 

Even so, I can’t help but think that a company like this trading on less than eight times earnings already offers great value. Time will tell. 

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Paul Summers owns shares of Churchill China and Somero Enterprises, Inc. The Motley Fool UK has recommended Churchill China and Somero Enterprises, Inc. 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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