Value and income investing have become increasingly challenging lately. So, it’s understandable to want to look at smaller-cap shares. Smaller companies, less often looked at by analysts, can by hidden gems with the potential for huge share price growth. It can be a very profitable way to invest.
A hidden gem with huge share price growth potential
One smaller company that flies under the radar of many investors is technology group D4T4 (LSE: D4T4). Data is said to be the new oil – the 21st century commodity of great value. Free data from users is the basis of much of Facebook’s value, for example.
D4T4’s gross profit margins have been growing and most recently stood at over 60%. The group has no debt, which is a major positive given the current economic backdrop that is hitting cash poor and indebted firms hard.
D4T4’s five-year return on capital employed is 18% – an indicator that the company can grow profitably. It’s a very important metric in my view. I believe this figure is a major positive and I’m sure it could be improved further.
Financially the tech company looks great. Yet many investors overlook it in favour of better known or bigger tech shares. As a result, these have become very expensive, while D4T4 has a trailing price-to-earnings multiple of only 17, which is very reasonable for a growth tech share.
All in all, I think it’s a hidden gem with huge share price growth potential. It could well enter my own portfolio in the coming months.
A not so hidden gem of a share
Shares in PZ Cussons (LSE: PZC), owner of brands such as Imperial Leather and Original Source, haven’t quite bounced back to where they started the year. The shares have a trailing P/E of 21 and a dividend yield of 2.3%. I think they offer a potentially rewarding combination of income and share price growth potential.
The group’s advantages are diverse market exposure, a wide range of brands, and exposure to emerging markets, in particular, Nigeria. Trading in the populous African nation has sometimes been challenging for the group, but it is a potentially big growth market.
Highly rated veteran fund manager Nick Train has bought shares. He likes companies in the fast-moving consumer goods sector. PZ Cussons is much cheaper than some of the other shares he owns such as Unilever and Diageo.
Train also likes companies with recognisable brands. Brand power gives the group pricing power, brand loyalty with consumers, and as a result, better sales and margins.
PZ Cussons undoubtedly has both room to improve and the potential benefit of growth from African economies in the coming years. Recent share price movement has been on the back of positive trading and director buys but long term, I believe it has much further to rise.
Overall, I think both D4T4 and PZ Cussons could be good additions to a portfolio of shares. I rate both highly and keep them on a watchlist, and I’m likely to add both at some point.
Andy Ross owns shares in Diageo. The Motley Fool UK has recommended Diageo, PZ Cussons, and Unilever. 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.