AB Dynamics

What it does: AB Dynamics designs, manufactures and supplies advanced testing, simulation, and measurement products to the global transport market. 

By Paul Summers. Having had my finger over the ‘sell’ button for several months, I’ve now disposed of my position in vehicle testing firm AB Dynamics (LSE: ABDP).

To be clear, this isn’t because I think the company is doing anything wrong. Indeed, it’s been a profitable business for many years and continues to boast a robust balance sheet. Conceivably, AB could also do very well as autonomous driving becomes a reality.

No, the reason I’ve sold is purely down to the valuation. Despite only growing revenue by 5% in the first half of FY24, the stock still trades at an eye-watering 31 times earnings at the time of writing. In the absence of a near-term catalyst for trading to improve, I can’t see the share price moving significantly higher for a while.

Whether I come to regret my decision remains to be seen. As things stand, however, I can see far better value elsewhere in the market. 

Paul Summers has no position in AB Dynamics.

Close Brothers Group

What it does: Close Brothers is a UK merchant bank providing motor finance, business lending and asset management services.

By Roland Head. I recently sold all of my shares in Close Brothers Group (LSE: CBG). The bank’s share price has slumped this year as a result of the UK financial regulator’s investigation into historic motor finance commission payments.

The outcome of this investigation and any potential liability is not yet known, but Close Brothers has already suspended its dividend as part of a plan to raise £400m in additional surplus capital.

While I believe the company will recover from the impact of this investigation, I think it may take longer than expected.

Looking further ahead, I wonder if regulatory changes will put pressure on the future profitability of motor lending, which is a major part of the bank’s loan book.

After this year’s falls, I think the business might be cheap at current levels. However, increased uncertainty and the lack of a dividend mean that it’s no longer a good fit for my portfolio.

Roland Head does not own shares in Close Brothers Group.

Greencore

What it does: Greencore is a leading international manufacturer of convenience foods.

By Alan Oscroft. I sold my shares in Greencore (LSE: GNC), and it might sound like it’s for a dumb reason.

Essentially, it’s because I can’t remember why I bought them.

And now I look again, I can’t make a good enough case to buy them. And if I wouldn’t buy a stock, I don’t think I should hold it. Especially when I see others I like better.

The Greencore valuation isn’t so bad. But a forecast price-to-earnings (P/E) ratio for 2024 of 14 doesn’t look that cheap, and I’d say it doesn’t offer much safety margin.

And the dividend yield of around 1.5% doesn’t exactly make it look like a top income stock.

Admittedly, forecasts would lift the dividend above 3% by 2026, and would drop the P/E to 10. But when there are plenty of FTSE 100 yields of 6% and more, it doesn’t appeal.

So, now the stock has recovered a bit, it was time for me to find somewhere else for the money.

Alan Oscroft has no position in Greencore.

ITV

What it does: ITV is a broadcaster operating terrestrial and digital channels in the UK and also provides production facilities and services.

By Christopher Ruane

Sometimes even a cheap-looking share can get cheaper. ITV (LSE: ITV) had long looked cheap to me. But as it fell to around 56p per share in February I added to my existing holding.

Annual results including a maintained dividend and share buyback helped lift the shares up to 75p over the following months.

I decided to sell a few of my shares to lock in some profits. I continue to hold most of them as I still think the business is undervalued considering its profitability, extensive audience and ongoing high demand for production facilities.

So why did I sell some of my shares?

Potential is one thing but tying money up for years on end has a cost. ITV does face real risks, from a traditional business in long-term decline to increasing digital competition. By taking advantage of a post-results jump in the share price, I was able to turn some paper gains into actual ones.

Christopher Ruane owns shares in ITV.

Supermarket Income REIT

What it does: Supermarket Income REIT owns and leases retail properties. Around 75% of its rent comes from Tesco and Sainsbury’s. 

By Stephen Wright. I’ve recently made the decision to sell my stake in Supermarket Income REIT (LSE:SUPR). There are a couple of reasons for this.

Chief among them is the firm’s rapidly growing share count. The number of shares outstanding has increased tenfold since 2018. 

That’s not a good thing – it means each share’s ownership in the company has decreased by 90%. And as an investor, I want to own more of a business over time, not less.

To some extent this is understandable. REITs often use equity as a means of financing, so I’m not surprised the share count has gone up.

I haven’t sold the stock just because the share count has increased, though. I’ve moved on because of how much it’s increased.

Over the same time period, Primary Health Properties – another UK REIT – has seen its share count roughly double. That’s much less dramatic, which is why I’ve moved my cash to there.

Stephen Wright owns shares in Primary Health Properties.

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What is the Alternative Investment Market?

The AIM is a sub-market of the London Stock Exchange (LSE). It is designed to help smaller firms access capital from the public market. The AIM allows these firms to raise capital by listing on a public exchange with more regulatory flexibility than the main LSE stock market.

The AIM is often seen as a more specialised unit of the LSE, catering to smaller, riskier firms. These firms are often more speculative in nature. This is in part due to the AIM’s more relaxed regulations and listing requirements. Since launching in 1995, the AIM has helped more than 3,865 companies raise more than £115bn.

As it stands, the AIM is home to over 850 firms with a combined market capitalisation of over £100bn. When a firm seeks an initial public offering (IPO) and listing on the AIM, they do this to access more capital. Often due to their size, they are not at the level to list on a large exchange. The process for a company listing on the AIM is similar to a traditional IPO, just with less strict requirements.

One major difference I found was the role that nominee advisers, often referred to as ‘nomads’, play in the process. These nomads are seen as the regulatory system for the AIM. They advise companies pre-IPO and after. One gripe frequently raised about this relationship is that nomads are responsible for regulatory compliance, but also profit in the form of fees from the firm they list. The regulation for firms listed on the AIM is often referred to as being ‘light touch’ compared to a major index.

Best stocks to buy now #1

My first pick from the FTSE AIM is growth stock AB Dynamics (LSE:ABDP). I believe it is a perfect example of an AIM success story. AB is involved in the automobile industry. It provides testing equipment and advanced measurement services to car producers in the UK and overseas.

Launched in 1982, AB Dynamics is not a new up-and-coming stock. In fact, it has continued to grow on a slow and steady basis. This is one of the main aspects I like about it. It floated on the AIM in 2013 for 115p. It reached all-time highs of 2,750p in November 2019. If I had invested at IPO stage, I would have seen a return of 2,291% at the shares’ highest levels.

As I write, shares are trading for 1,860p per share. At this time last year, shares were trading for 2,140p. This decrease in share price does not worry me. In fact, I see it as an opportunity to buy cheaper shares. The dip is attributed to the pandemic and the lack of new cars being produced in recent times. Economic pressures have also affected the automobile industry. I believe as the economic reopening continues, AB Dynamics could benefit and its share price rise closer to previous highs. 

Reviewing past performance, AB has reported year-on-year revenue and gross profit growth for the past four years. I understand past performance is not a guarantee for the future but I use it as a gauge when researching the best stocks to buy now.

The risks with AB Dynamics are closely linked to the economy, the pandemic, and reopening. If new car production continues to falter, AB Dynamics could see demand for its services reduced. This will affect its performance and financials, as well as investor sentiment, and its share price could suffer.

Overall, I would consider adding AB Dynamics shares to my portfolio right now. The global car industry is experiencing production issues, but I feel this is a short to medium term issue. I invest for the long term. I expect to see AB prosper longer term, offering me a good return.

Best stocks to buy now #2

The next FTSE AIM stock I like is GlobalData (LSE:DATA). Global is a data and analytics consulting firm with a global footprint and reach. Launched in 1999, I would argue it moved into an innovative sector before that sector really took off. After all, data and analytics wasn’t really a prominent concept in 1999, compared to the role data plays in our lives currently.

GlobalData listed on the FTSE AIM back in 2009 for 89p. As I write, shares are trading for 1390p. If I had invested when it was first listed, I would have seen a return of 1,461%! Shares have continued on an upward trajectory since its listing and are currently trading just over pre-crash levels. With a market-cap of over £1.4bn, it could soon join the main FTSE index. It is one of the largest listed firms on the FTSE AIM based on market cap.

There are a few reasons I class GlobalData as one of my best stocks to buy now on the FTSE AIM. Firstly, like AB Dynamics, Global has a good track record of performance. It has seen revenue and gross profit grow year on year for the past four years. In addition to that, it regularly acquires businesses to boost its profile and offering. Acquisitions excite me as a potential investor as it shows willingness to grow, which could increase my returns.

There are risks with GlobalData, however. Competition is rife in the data and analytics sector. There are several well known names that operate in the space, which could affect its market share. These household names could affect performance and in turn, financials too. In addition, acquisitions don’t always work out. Sometimes, firms can overpay for the business they are buying and this can affect the balance sheet and the share price.

Overall, I would add GlobalData shares to my portfolio right now. I expect its growth journey to continue, especially as data and analytics services are in higher demand than ever. 

The post 2 of the best stocks to buy now on the FTSE Alternative Investment Market! appeared first on The Motley Fool UK.

Headlam

I think floor coverings distributor Headlam (LSE: HEAD) might fit the bill of being a cheap UK share. Sure, this is hardly exciting stuff. However, it’s a market leader at what it does and one that seems to be coming through the other end of the Covid-19 storm in good shape.

Today, the company announced it had seen a “strong recovery” in trading. Total revenue of just under £330m over the first six months of 2021 is close to what the company achieved in the same period in 2019. Clearly, it’s also far ahead of last year (£227.2m).

As one might expect, this rebound was good news for underlying pre-tax profit at Headlam. This came in at £16.7m — a huge contrast to the £1.8m loss reported for the first half of 2020.

I reckon this momentum will continue. While activity in the commercial sector remains “subdued“, HEAD has still been trading in line with recently-upgraded expectations in the last few months. It’s also been able to maintain inventory levels despite issues with its supply chain. The resumption of normal dividend payments faster than thought also gives me confidence. 

Sure, Headlam isn’t risk-free. A rebound in Covid-19 infection levels would be less than ideal as the company goes into its traditionally busiest part of the year trading-wise. The share price performance hasn’t been magnificent either. While up 63% over the last year, the stock is still only 10% above where it was five years ago. So, I wouldn’t expect massive gains (like those seen at this FTSE 250 firm) any time soon.

Still, a valuation of 16 times earnings, reducing to 13 next year based on analyst projections make this a potentially good deal for me. 

Ab Dynamics

Another small-cap stock that could prove a good long-term buy for me is automotive testing firm AB Dynamics (LSE: ABDP). That’s despite the company’s share price falling 22% in 2021 so far, including a 6% fall today. 

At least some of this is due to trading still being stodgy in the wake of the pandemic. Recent news that founder Anthony Best has taken retirement hasn’t gone down well either. He does, after all, own over a quarter of the company’s stock and may be inclined to begin selling.

As a holder already, I can’t say I’ve been over the moon about all this. Moreover, this is unlikely to be regarded as a cheap UK share for anyone with a short investing horizon.

However, the fact that this company works with 25 major car manufacturers around the world speaks volumes. I struggle to think why the demand for its services won’t rapidly increase in the years ahead with the advent of autonomous driving. In addition to this, AB is also financially sound. So, not a cheap UK share in the traditional sense, but increasingly good value based on potential growth.

If anything, I think now could be a time for me to top up my holding. 

The post 2 cheap UK shares I’d buy now appeared first on The Motley Fool UK.

NIO stock: opportunity knocks?

NIO’s fall from grace shows just how quickly market sentiment can change. From this time last year to February, the share price climbed a quite staggering 1,800% to just under $63! Since then however, it’s tumbled to just above $41 a pop. What’s going on?

The chief reason for stock’s decline is arguably not of the company’s making. The global chip shortage has impacted many hot tech stocks and this is likely to continue for the rest of 2021. That’s problematic for the Chinese electric car maker, especially given the encouraging progress it’s made on rapidly upscaling production over the last year. 

We also need to consider whether the decline of NIO stock may be partly due to the fall in US rival Tesla‘s (still probably absurd) valuation. A drawback of being in a hot space like electric vehicles means that all company share prices tend to rise and fall in tandem.

On top of this, NIO simply isn’t selling anywhere near the same amount of cars as Tesla. That’s ironic considering the latter’s sales figures are still far lower than traditional manufacturers. And while the chip shortage will be resolved, competition in this space won’t get any easier. 

All this makes me think that NIO’s fall may not be complete, especially if the perpetually frothy US market were to cool. Despite enduring a similarly tough time, I think there’s another automotive-related share worth buying. What’s more, it’s UK-listed! 

Contrarian pick

Today’s interim numbers from AB Dynamics (LSE: ABDP) haven’t been welcomed by the market. As I type, the share price of the testing systems supplier is down 8%. 

This is understandable. Revenue came in at £27.3m over the six months to the end of February. That’s a slight improvement on the second half of 2020. However, it’s still below the £34.7m achieved in H1 2020. Statutory operating profit of £1.4m was also less than half the £3.6m achieved over the same period in 2019/20.  

That said, I remain optimistic. Order intake improved over the period as confidence returned among AB’s customers. Although most definitely not an income stock, the payment of dividends also suggests confidence in the medium-term outlook. In the meantime, AB boasts a solid balance sheet with net cash of £33.1m. 

Naturally, the rebound will take time, especially if the UK experiences a third wave of the pandemic. As CEO Dr James Routh reflected this morning: “Visibility remains limited and there remains short-term uncertainty as to the shape and rate of the recovery.”

Factor in some Brexit-related concerns and today’s share price dip makes sense. 

Solid hold

For me however, the growth opportunities in this space remain compelling. AB already serves the top 25 global manufacturers and is a trusted leader in its niche market. As a ‘picks and shovels’ play on the electric and autonomous vehicle market, I think it’s a great option.

By now, you’ll have gathered I’m happy to continue holding my shares. But I’m less inclined to think NIO stock represents the opportunity of a lifetime just yet.

The post NIO stock is down over 33%! Is this the opportunity of a lifetime to buy? appeared first on The Motley Fool UK.

And I think I may have just found a potential candidate. Let’s take a look.

A leader in vehicle testing

AB Dynamics (LSE:ABDP) is a vehicle testing company that serves the global automotive industry. It designs, manufactures, and supplies advanced testing systems and measurement equipment to vehicle manufacturers.

The business has two departments. Track Testing is the larger of the two, generating nearly 84% of total revenue. Using its technology, vehicle dynamics, autonomous systems, and advanced driver assistance systems (ADAS) can be put to the test. In other words, the company verifies the performance of new vehicles and ensures that self-driving cars don’t bump into people.

The second business segment is Laboratory and Simulation testing. It serves a more niche (but essential) sector of the automotive industry. The firm uses specialised software to create accurate assessments of noise, vibrations, and kinematics of vehicle designs. This process ensures that new vehicles comply with regulations as well as identifying potential problems before any stage of manufacturing begins.

With various forms of self-driving technology becoming more widely available, these services are subsequently becoming more essential. This is a key trait I look for when searching for the best UK shares to buy now. But there are risks to consider.

The risks of a shifting landscape

The majority of revenue growth appears to originate from ADAS testing. However, this does expose the firm to some degree of risk. The technology is relatively new and constantly evolving. Suppose AB Dynamics is unable to continue enhancing its testing systems to keep up with this evolution. In that case, competitors might be able to swoop in and steal market share.

To me, this is particularly concerning, as the firm operates in a niche market space. This means the pool of available customers is quite limited, and thus the battle against competitors is fierce. This risk is somewhat mitigated by its diversified collection of clients, with the largest contributing less than 5% of total revenue. However, any client loss may take a while to bounce back from.

Another risk that stands out to me is its international operations. Only 28% of revenue originates from within the UK. The rest is generated internationally, primarily within North America (25%) and Asia (45%). This worldwide reach enabled AB Dynamics to become a globally recognised brand within the industry. But, it also exposes the company to continuous exchange rate risks across multiple currencies, which could impact the bottom line.

Is it among the best UK shares to buy now?

The pandemic has taken its toll on both the company and the share price. Disruptions to the global automotive industry have resulted in a significant number of orders to be deferred. And this is likely to continue throughout the first half of 2021.

However, I believe this has created another buying opportunity for my portfolio. The revenue is delayed, not lost. And the stock was still able to achieve top-line growth of 6% in 2020.

I think it now looks undervalued. Combining that with its unique and rapidly expanding business, makes me believe that AB Dynamics really could be one of the best UK shares to buy now.

The post I think this could be one of the best UK shares to buy now appeared first on The Motley Fool UK.

Boohoo shares: primed to recover

First, it seems clear to me Boohoo is doing everything it can to address the concerns raised regarding its supply chain earlier in the year. The appointment of a big-hitter like Sir Brian Levenson to chair an independent review speaks volumes. Both in how seriously they’re taking allegations, but also in how much they’re prepared to invest in getting things right. 

Another reason I’ve continued buying Boohoo shares is that I suspect 2021 will see the company embark on another canny acquisition spree. Although pure speculation at this point, I wonder if battered brands such as Ted Baker, New Look and Topshop might be on its shopping list. It’s certainly got the financial firepower to make some opportunistic bids. 

Third, the business is still performing extremely well. Unlike other retailers, selling fast fashion has never been an issue for Boohoo, even during lockdowns and recessions.

Although nothing can be guaranteed, I’d be surprised if trading was worse than expected when we get the next update in January. Let’s not forget the AIM star raised guidance on revenue growth to somewhere between 28% and 32% back in September. It’s previously predicted a 25% increase.

Finally, there’s the valuation. A forecast P/E of 36 will make value investors dizzy, but this must be seen in context. Boohoo is rapidly building a presence in the US and other markets. It’s also as savvy as they come with social media and has no physical stores to maintain.

Add all this together and it’s a recipe for a solid recovery (and then some), in my view. 

Stuck in gear… for now

Like Boohoo, shares in automotive tester AB Dynamics (LSE: ABDP) have been out of sorts in 2020, albeit for completely different reasons. I’ve been adding to my position here too. 

Similar to many other companies, trading at AB has been impacted by the coronavirus. Despite revenue rising 6% to £61.5m, last month’s full-year results spoke of reduced driving robot sales, a suspension of testing operations, and deferments of orders. Trading looks to be improving, but there’s clearly some way to go.

As a Foolish investor however, I’m not all that interested in numbers from the next 6- or 12-month period. I’m looking at the long term. I’m asking will the share price be higher in five or 10 years?

I think it will be in both periods. Sure, visibility on trading isn’t great right now. But the inevitable rise of electric cars and automotive technology should be a massive tailwind for the UK business. It’s already reported “strong geographic growth” in Japan and the USA. It also continues to launch new products into its market.

Moreover, I think AB has the financial discipline to get where it wants to go. It had £31.2m in cash at the end of August, despite continuing to invest in systems and infrastructure. In a further sign of confidence, dividends were reinstated last month. What a contrast to other stocks on the market!

AB won’t rebound overnight, but I’m optimistic buying now will mean I’m richly rewarded in time. 

The post I can’t stop buying Boohoo shares for my ISA! Here’s why appeared first on The Motley Fool UK.

A profitable niche company

Automotive testing group AB Dynamics (LSE: ABDP) is an example of a company most investors won’t have heard of. It operates successfully in a niche where it has carved out a profitable role for itself. Its clients include the top 25 global vehicle manufacturers, all seven Euro NCAP laboratories and numerous government test authorities.

Sales are being boosted by increasing vehicle safety regulation. It has also increased the amount of its recurring revenue in recent years, which is helpful as clients delay purchasing decisions because of Covid-19.

In the short term, R&D in the automotive sector will take a hit from Covid-19 and electric cars could well revolutionise the industry, but in many ways AB Dynamics looks to me to be a hidden gem with huge growth potential.

It has barriers to entry, strong customer relationships, cash on the balance sheet and is profitable. These all give me confidence in its future. 

An AIM growth share with Asian growth potential

Polar Capital (LSE: POLR) is a boutique asset manager. As it’s in the financial industry, it was hit hard by the market sell-off earlier this year. The bounce-back has been strong and the shares have nearly recovered the ground they lost. I think there’s further to go though.

Polar Capital has been ramping up the number of teams within the group. This will boost assets under management in future years I believe, which should then feed into greater earnings and profits.

The group also has far greater opportunities to expand into new geographies such as Asia. That is an area of focus for the asset manager right now, which could bear fruit in the coming years for investors who buy the shares cheaply. Given its growth potential, the shares are cheap, with a P/E of only 12. Its an asset-light model so the group has little debt, which is good at a time like this.

Capitalising on the growth of gaming

Sumo Group (LSE: SUMO) is in the red hot gaming sector. But it’s not the most well known company in the sector. It develops games like Team Sonic Racing and has eight UK studios.

Growth in earnings and revenue has been impressive in recent years. For example, revenue has gone from £8.6m in 2016 to £49m in 2019.

As part of its strategy, the video games service provider wants to acquire earnings-enhancing premium video game service providers and complementary video game developers. This could be a catalyst for growth if bolt-on acquisitions are managed and integrated well. Rival Team17 has successfully done this and seen subsequent share price growth.

With a market cap of around £300m, the group has plenty of room to grow. It’s in a growth industry, has a strong portfolio of games, could up the number of releases each year and it’s profitable. This combination makes me think this hidden gem AIM growth share could continue to do well for shareholders. 

The post I think these AIM shares could be hidden gems with huge growth potential appeared first on The Motley Fool UK.

Long-term growth drivers

AB Dynamics (LSE: ABDP) designs, manufactures and supplies advanced testing systems and measurement products to the global automotive market.  Growth has been brisk and the company has an impressive multi-year record of rising revenue, earnings, cash flow and shareholder dividends.

The stock has done well but now sits around 40% below its previous highs because of the coronavirus pandemic. There’s been a hit to business this year and the directors cancelled the interim dividend. They also withdrew forward guidance because of the uncertainty thrown up by Covid-19. Such actions have been common among many companies this year.

In April, with the half-year results report covering the period to 29 February, the company revealed more blistering growth figures. But it also warned there had been a “material” reduction in order intake and a “deferment” of some large orders because of the pandemic.

However, in April, there was a net cash pile of just over £35m, which compares well to the market capitalisation near £386m. The cash should help the business survive the crisis and support the company’s “investment requirements.”

Looking ahead, the directors reckon long-term regulatory and structural growth drivers support  AB Dynamics’ growth prospects. And I reckon the shift to electric vehicles is helping to fuel the trend. Meanwhile, lockdowns have been easing around the world and the automotive industry has proved its ability to function alongside the virus.

I think the return of some stability in the sector reflects in the consolidation of the share price over the past three months or so. Meanwhile, City analysts appear to be optimistic about a bounce-back in earnings next year.

Short-term headwinds

It’s true that companies are hard to value right now when immediate trading is uncertain for many businesses. And AB Dynamics could be vulnerable if a worldwide economic slump gains traction, perhaps because of another flair up in Covid-19 infections. However, on balance, I see the stock as attractive right now.

The company has carved out what looks like a well-protected niche in the industry. And, prior to the pandemic, the operating margin had been running just above 12%. Meanwhile, the compound annual growth rate for earnings was just above 28%. Growth had been both organic and through acquisitions.

There’s no doubt the company enjoyed strong performance before the crisis, and the stock became something of a market leader. Indeed, the proven growth story caused the valuation to re-rate higher and we’ve become used to seeing the market assigning a premium valuation to the company. But I wouldn’t let a robust rating put me off buying some of the shares now – this is a high-quality enterprise.

I reckon the set-back induced by the pandemic makes AB Dynamics one of the best UK shares to buy now, based on the potential of the underlying enterprise.

The post I reckon this is one of the best UK shares to buy now appeared first on The Motley Fool UK.

With this in mind, here’s one stock that I think should do no harm to investors’ wealth prospects over the medium-to-long term. It could even help them to retire early!

Small-cap, huge growth

Go back a few months and the share price of advanced testing systems designer, manufacturer and supplier AB Dynamics (LSE: ABDP) was riding high. Based on today’s numbers, it’s not hard to see why. 

Serving the automotive sector, revenue at the small-cap rose 34% to £34.7m over the six months to the end of February. Positively, 25% of this was recurring, up from 10% thanks in part to contributions from recent acquisitions.

Broken down, the firm achieved strong sales growth in both its track testing and lab testing/simulation sectors (29% and 82% respectively). In line with its push to grow overseas, “particularly strong” performances at its sales offices in the US and Japan were also reported.

Uncertain times

Despite these stellar results, AB’s stock was down (very) heavily in (very) early trading. Although surely anticipated, much of this looks to be a reaction to the rather gloomy outlook.

Performance over the second half of the financial year is now “highly uncertain” thanks to the virus. While “a material reduction” in business is yet to be seen, it did say that some larger orders had been deferred. Unsurprisingly, guidance on earnings for the year was withdrawn.

Despite all this, I remain optimistic on ABDP’s ability to weather the storm.

For one, the company is doing exactly what you’d expect to survive this sticky period. Discretionary spending and capital expenditure have been reined in. The interim dividend has also been suspended.

Secondly, it has the sort of finances many firms would kill for. The £340m cap is debt-free and had cash of a little over £35m at the end of February. This is 86% higher than in the previous year. 

Third, it’s hard not to be bullish on the small-cap’s prospects considering the ongoing importance of protecting drivers. The increased adoption of autonomous systems surely bodes well for the Bath-based business, once the coronavirus crisis has passed.

Naturally, being an owner of the stock already makes me somewhat biased. The fact that I haven’t even considered selling in the market crash, however, is testament to how confident I am on the likelihood of it generating great returns in time.

Steer clear

Another automotive-related small-cap stock I still won’t go anywhere near, however, is breakdown service provider and insurer AA (LSE: AA). 

While AB Dynamics is a clear leader in its niche, the AA continues to operate in a highly competitive environment. Given the low barriers to entry, the alarming drop in new car sales, and the possibility of a long recession, I can’t see how the firm will significantly increase its membership count going forward. 

In addition to all this, AA’s balance sheet continues to creak with debt. Why invest in a company with such huge liabilities when there are so many better opportunities elsewhere? 

Less traffic may mean fewer callouts for a while. However, I’m very sceptical over AA’s ability to help its investors retire rich.

I suggest Fools continue to steer clear of this value trap.

The post Looking to retire early? I think this small-cap stock will help appeared first on The Motley Fool UK.

With that in mind, here’s a look at my top three UK small-cap stock picks for 2020.

Artificial intelligence-fused digital marketing

DotDigital Group (LSE: DOTD) is a fast-growing technology company that specialises in artificial intelligence-fused digital marketing solutions. Its key marketing platform, Engagement Cloud, which helps businesses connect with customers, is used by over 70,000 marketers in 156 countries.

DotDigital issued a strong set of full-year results in mid-October. For the year ended 30 June 2019, organic revenue from continuing operations climbed 15% to £42.5m, while adjusted earnings per share jumped 33% to 3.88p. Meanwhile, recurring revenue as a percentage of total revenue climbed to 86%.

Looking ahead, analysts expect revenue and earnings per share of £48.9m and 4p respectively this year. I believe there’s a good chance the group will beat these forecasts, given its strong growth in the US and Asia. This could send the share price significantly higher. 

At present, DOTD shares trade on a forward-looking P/E ratio of 24.5. I see that valuation as very attractive.

Legal industry disruptor

Next up, Keystone Law (LSE: KEYS). This is an innovative, next-generation law firm that is disrupting the market by enabling lawyers to work from home or their own offices. It currently has over 300 lawyers on board (it believes its addressable market is potentially 47,000 lawyers), and its clients include Tesco, the BBC, and Siemens.

Keystone has grown at a rapid rate over the last few years (three-year revenue growth of 104%) and I’m expecting further growth in the years ahead. Directors believe the business model enables “rapid scalability” and if the special dividend of 8p that was declared in the group’s first-half results in September is anything to go by, management is certainly confident about the future.

Turning to the valuation, Keystone shares currently trade on a forward-looking P/E ratio of 37. That is a lofty multiple, however, given the exciting growth prospects here, I don’t see it as a deal-breaker.

Autonomous vehicles play

Finally, my last UK small-cap stock pick for 2020 is AB Dynamics (LSE: ABDP). It’s a provider of integrated test systems for the global automotive industry. Given that the group’s products are integral to the development of new vehicles, I see ABDP as a good way to gain exposure to the self-driving cars market. In the years ahead, manufacturers will need to evaluate their autonomous vehicles extensively under a large number of complex scenarios and ABDP is well placed to benefit.

AB Dynamics issued a great set of full-year results in late November. For the year, revenue climbed 56%, while adjusted diluted earnings per share increased 50%. The company also said that it remains confident that it will continue to deliver further growth in the coming year. However, since the results, the shares have pulled back from above 2,800p to around 2,000p.

I think this pullback has created an attractive entry point. Given the company’s strong growth, I think the stock’s forward-looking P/E ratio of 30.7 is quite reasonable.

The post Looking to outperform the FTSE 100? Here are my top UK small-cap growth stocks for 2020 appeared first on The Motley Fool UK.