This is actually slightly lower than the average broker 12-month target of 181p. Comparing this to the current price of 101p, we see a 79% difference.

Interestingly, all eight analysts covering the stock are overwhelmingly bullish.

Of course, brokers are not always right about a stock, let alone accurate at foreseeing its near-term price trajectory. But the disconnect is striking. So what do they see in Hostelworld?

From one to three

As a reminder, Hostelworld is a small-cap stock with a market cap of £125m. It operates a platform where travellers can book to stay at over 14,700 hostels across more than 3,100 cities worldwide.

Last year, net revenue rose 2% year on year to €93.8m, with bookings growing 1% to 7m. However, adjusted profit after tax fell 14% to €15m.

Admittedly, on the surface, these numbers don’t seem particularly impressive. But whereas Hostelworld spent almost all of 2025 with just one revenue generator (hostels, obviously), this year it has three.

It now offers 18,000+ budget locations (including hotels and guesthouses) through a third-party inventory supplier. While the commission rate is lower on these, it should still drive more bookings and revenue.

And there’s Social Passes, which the company launched in November. Through these, people who haven’t booked on Hostelworld can access its social network, allowing them to message, plan trips and join events with other travellers staying in the same location.

One-time payments to access the social network range from €4.99 a week to €59.99 for the year (for digital nomads or long-term travellers). The Social Pass adds a new subscription-type revenue stream.

Additionally, Hostelworld has acquired OccasionGenius for $12m. This is a business-to-business event discovery platform that has a ton of reliable local events worldwide. Ideally, this data should inspire travellers to book trips.

Network effects

It’s this burgeoning social element where I think a lot of future shareholder value could lie. Because it’s creating a network effect, where the platform becomes more valuable as more people use it. Additional users also expand the platform’s proprietary data set.

At the end of 2025, Hostelworld’s social community reached 3.4m members. Messaging between them grew 81% year on year, with members booking approximately twice as frequently as non-members. And Social Pass members are also subsequently booking through Hostelworld. 

Management said that Q1 trading had been strong, with a 3% rise in bookings expected alongside a 12% increase in revenue. So growth seems to be picking up, driven by the social travel network.

If more people book straight through the app, this should lower marketing costs and improve long-term margins.

Very cheap valuation

The biggest risk to near-term growth is the Middle East conflict, particularly inflation that might further damage discretionary spending. It could also result in higher fuel costs and therefore impact flight pricing.

However, with the stock trading at just 6.9 times next year’s forecast earnings, I think a lot of risk is already priced in. There’s also a 3.4% forward dividend yield.

Putting all this together, I reckon Hostelworld deserves further research as a deep value/recovery play.

The post With a P/E under 7, this value stock looks far too cheap at 101p appeared first on The Motley Fool UK.

One of the biggest causalities of the Middle East conflict — due to the spectre of higher interest rates — has been the small-cap sector. Many shares here have dropped 20% or more year to date.

Here are a pair of falling small-cap stocks that are worth checking out.

Burgeoning social travel platform

Hostelworld (LSE:HSW) is an online booking platform showing hostels and budget hotels. Naturally, this makes it very popular with young and solo travellers.

The stock has fallen 20% year to date and 40% over two years, resulting in a £125m market cap.

Now, the obvious near-term risk here is a spike in inflation. This could put pressure on discretionary spending, leading to less travel and fewer bookings. Meanwhile, restricted Middle East airspace isn’t ideal for global travel.

However, what I think is underappreciated about Hostelworld is that it’s quietly turning into a social network. Travellers who book on its platform get to message and interact with others staying in the same hostel, as well as plan and book meet-up events.

Not only does this differentiate Hostelworld from larger rival Booking, it’s also driving more repeat business and deeper loyalty among users. It also has the potential to reduce marketing costs in future as more travellers book directly through the app rather than via a Google search.

Hostelworld ended 2025 with over 3.4m social members. Since launch in 2022, they have sent 16m chat messages and booked 17m times. So this is really starting to catch on.

Looking ahead, this network could become much larger because the platform is opening up social features to non-Hostelworld travellers (for a fee). As this scales in future, there could be loads of monetisation potential.

The most attractive thing here is the ultra-cheap valuation, with the stock trading at 8.4 times this year’s forecast earnings. In 2027, this drops to just 6.8, as net income is forecast to surge around 170% between 2025 and then.

That’s not all. The company has started paying a dividend (which it cancelled during the pandemic), and the forward dividend yield is 3.5%.

Finally, City analysts see a lot of value here. The average price target among six brokers is 183p — around 83% higher than the current price!

Fast-growing payments network

The second cheap small-cap stock is smartphone payments facilitator Boku (LSE:BOKU). The £517m fintch has plummeted 29% since October.

Yet the company, which calls itself the “payment network trusted by tech giants“, is growing nicely. And its network now reaches 300+ payment methods worldwide, enabling merchants to transact with unbanked mobile users.

Last year, revenue increased 30% to $128.8m, while adjusted EBITDA jumped 36% to $41.3m. Looking ahead, management is guiding for 20%+ growth over the medium term, as local payments through smartphones rocket across Southeast Asia and Latin America.

Again, the main risk here is a global economic downturn, sparked by surging energy costs. This could see a slowdown in payment volumes.

However, the stock’s trading at 16.7 times 2027’s forecast earnings. That looks cheap for an increasingly profitable high-growth company.

The post 2 badly beaten-down small caps to consider for a £20,000 Stocks and Shares ISA appeared first on The Motley Fool UK.

In situations like this, there will inevitably be wheat getting thrown out with the chaff. Canaccord Genuity seems to think so, because on 27 March the broker gave Hostelworld Group (LSE:HSW) a Buy rating, with a new 205p price target.

As I write, this small-cap is 100p, suggesting it could surge 105% over the next 12 months. While such targets are not predictions, and stocks can ultimately go anywhere, it does show that Canaccord Genuity believes the market is significantly undervaluing the business.

Why might that be? Let’s take a closer look at the stock, which is currently trading close to a 52-week low.

Niche booking platform

As a quick reminder, Hostelworld’s a travel booking site that’s particularly popular among younger and solo travellers. It has hostel and budget hotel partners in more than 180 countries, generating 7m net bookings last year.

With a £124m market-cap, Hostelworld’s still quite a small company, and it took a beating during the pandemic when much of the global travel industry effectively shut down. Another disruptive incident like this is a key risk.

However, since the end of the pandemic, business has bounced back. Last year, revenue was €93.8m, higher than before the outbreak, and adjusted EBITDA was €19.9m.

Meanwhile, the firm ended 2025 with net debt of €1.6m, a significant improvement from €13.4m in 2022. So the balance sheet is much stronger now, supporting the reinstatement of a progressive dividend for the first time since 2019.

Indeed, after falling 20% year to date, the stock’s offering a 3.4% forward dividend yield. This rises to 4.5% for 2027, based on the latest forecast.

Social travel pivot

To distinguish itself from other travel booking apps and deepen its moat, Hostelworld is developing a social network. When someone books, they get access to group chats with people staying in the same hostel, as well as link-up events (jungle trek, pub crawl, etc). 

It now has over 3.4m social members, with 16m chat messages sent between them. Importantly, this social feature helps alleviate the biggest fear among solo travellers: being lonely. 

And the crucial thing here for investors is that social members are booking around twice as frequently as non-members. In other words, they’re much more likely to open the Hostelworld app next time they travel instead of searching on Google.

Consequently, marketing cost as a percentage of revenue fell to 45% in H2, down from 48% the year before. If this social network effect reaches a big enough scale, it should make Hostelworld more profitable, as well as keep travellers loyal to the app.

In November, it opened up the social platform to travellers who don’t book accommodation, adding subscription-type revenue to the mix.

Inexpensive small-cap

The stock looks cheap, trading at just 7.9 times forward earnings. Granted, this isn’t a high-growth share, but that looks decent value, especially when paired with the 3%-4% dividend yield.

Anywhere around 100p, I think Hostelworld’s worth digging into as a cheap recovery play.

The post This FTSE small-cap stock can surge 105%, says one broker appeared first on The Motley Fool UK.

The stock first came to my attention on 19 June. That was the day on which it announced a £5m share buyback programme. The group’s share price closed that day 23.5% higher at 147p.

A different story

But yesterday (10 July), the shares tanked 8% after the group released a disappointing trading update for the six months to 30 June 2025. Growth appears to have stalled with both net revenue (€46.7m) and net bookings (3.7m) unchanged from the same period in 2024.

After the pullback, the group’s shares now change hands for around 128p. This is approximately 17% lower than their 52-week high.

Cheap and cheerful

As you would expect from a company operating in a price-conscious market, Hostelworld’s a high-volume, low-margin business.

An indicator of how cheap its hostel accommodation can be is the group’s net average booking value (ABV). This fell by 1% during the first half of the year to €13.40. According to its website, during the first week of August, it’s possible to get a bed close to the centre of Paris for €23 a night.

Not surprisingly, the business was badly affected by the pandemic. But it’s enjoying better times now. It has ambitions to grow through acquisition. The group’s also looking to expand further in Latin America and Asia, popular destinations for budget-conscious travellers.

During the second half of the year, it hopes to resume its dividend. The intention is to return 20%-40% of adjusted profit after tax to shareholders.

Using last year’s adjusted EPS of 13.97 euro cents (12.04p) as a guide, this would be 2.41p- 4.82p, implying an impressive yield of up to 3.8%.

Pros and cons

However, there are risks.

Covid-19 reminded us how vulnerable the travel industry can be to widespread disruption. And there’s nowhere to hide in a low-margin business if things start to go wrong.

Cyber security threats are also an ever-present risk for any online business. Also, the sector remains very competitive.

But what I like most about the company is its ability to generate cash. During 2023-2024 it repaid (net) €38.8m of borrowings. As of 31 December 2024, it reported a net cash position of €1.7m.

And its shares are currently trading at 10.5 times historic earnings. Compared to fellow travel agent, On The Beach (20.8), this is cheap. According to the London Stock Exchange, the sector average is 14.8.

However, the key question is whether the flatlining of bookings is a blip or the first sign of a more fundamental problem.

Of course, nobody knows for sure. But looking at June in isolation, both booking volumes and the group’s ABV increased. And although European bed prices are falling slightly, this is helping to boost demand.

In addition, although not expected to be launched until later this year, Hostelworld says its other growth initiatives are progressing as planned.

On this basis, it sounds as though growth has resumed once more and that the company has an exciting period ahead. Long-term investors could consider adding the stock — which currently trades at a discount to its peers — to their portfolios.

The post Is this under-the-radar UK stock as cheap as its rooms? appeared first on The Motley Fool UK.

However, there are a few different ways to invest in the long-term global travel trend. Here are a couple of less obvious plays that I think will ride the wave, making both worthy of consideration.

Your global chauffeur

Uber (NYSE: UBER) is available in more than 15,000 cities across 70 countries, carrying out around 34m trips per day on average. 

At the end of March, the ridesharing giant had 170m monthly active customers. And Q1 revenue grew 14% to $11.5bn — or 17% on a constant currency basis — while $2.5bn in free cash flow was generated. Strong stuff.

Airport trips are a goldmine for Uber. Personally, I don’t use any other firm abroad, assuming the app is available. The reason? Because, like many other tourists, I’ve been ripped off by local taxi drivers in the past. Not a great experience. So I value the cashless payment and transparent pricing on the Uber app. 

However, it’s not just taxis. On Uber nowadays, you can also book train and coach trips, plane tickets, boat rides, and hire cars.

Meanwhile, Uber and Emirates have just signed an agreement to allow customers to book flights and Uber rides together in one go. Arguably then, the app is on the way to becoming a diversified travel‑booking powerhouse! 

As always with Uber though, adverse regulation is a risk in certain cities. Also, competition from local rivals in Asia and Latin America is fierce. 

Nevertheless, the company looks perfectly placed to benefit from the long-term growth in global tourism.  

Uber has solidified its position as the global leader in both the rideshare and food delivery industries. As the dominant platform in both categories, Uber is now benefiting from scale, pricing discipline, and powerful network effects that create a near-impenetrable moat. 

Blue Whale Growth Fund

Budget travel

Next up is Hostelworld (LSE: HSW), which caters to a specific niche: young and budget-conscious travellers. Think backpackers, solo explorers, and digital nomads staying in hostels.

This is a niche that’s booming right now, especially in Asia and Latin America.

The Dublin-based company has hostel partners in over 180 countries. However, it’s evolving from simply a booking platform into a social network. The app now connects travellers before they arrive, encouraging group meetups and driving more engagement on the app.

In March, it had 2.6m social network members. Management says they make 2.2 times the bookings compared to non-members over the first 91 days after signing up, and are 3.2 times more likely to book on Hostelworld’s app.  

The firm expects low double-digit revenue growth in revenue in both 2026 and 2027. And it’s just brought back the dividend for the first time since it was axed during the pandemic. A £5m share buyback has also just commenced. 

Now, one risk here is that Hostelworld is quite small, with revenue of £92m last year and a £173m market cap. Were something to negatively impact global travel demand, the business could quickly come under pressure. This happened during the pandemic.

That said, the firm’s balance sheet is in much better shape nowadays, with no debt. I think the stock is worth a look while it’s still trading cheaply.

The post 2 stocks to consider buying in July for the long-term travel boom appeared first on The Motley Fool UK.

However, with those dark Covid days thankfully in the rear-view mirror, the share price has been steadily regaining lost ground. It’s gone from 77p back then to 136p, representing a gain of roughly 79%.

Yet City brokers see further potential gains ahead, and have a consensus price target of 192p. That’s 40% higher than the current level, though there’s no guarantee it will reach that price within the next 12 months.

Interestingly though, all seven analysts covering this small-cap stock are very bullish, rating it as a Strong Buy.

What do they see in Hostelworld? Let’s check out some details.

Niche market

For those unfamiliar, Hostelworld is basically the Airbnb of hostels. It acts as a marketplace, taking commission when travellers book accommodation via its website or app. 

The company has hostel partners in over 180 countries, and younger travellers make up the majority of bookings. In 2019, Hostelworld generated €80.7m in revenue and a net profit of €8.4m. Then it endured three years of losses before returning to profitability in 2023 as global travel rebounded after the pandemic.

In 2025, it’s expected to report €97.5m in revenue and a net profit of €13.9m. So it’s managed to weather the Covid storm, and is growing once again.

Growth plan

Building on this momentum, management recently set out a growth plan. The target is for low double-digit revenue growth in 2026 and 2027, with an adjusted EBITDA margin above 20%, and adjusted free cash flow conversion of about 70%. 

The company has a strong balance sheet, with no debt, and an €8m net cash position at the end of 2024. The dividend has been reinstated, with a progressive policy of 20%-40% of adjusted post-tax profit, starting in the second half of this year.

It has also just commenced a £5m share buyback programme.

Social network

One area the firm is seeing success in is its social network. This allows members to message, connect, and meet up with like-minded travellers.

Launched in Q2 of 2022,  the network had 2.6m members by Q1 2025. These social members are booking 2.2 times more than non-members over the first 91 days after signing up. So there is evidence of strong network effects emerging here. 

Hostelworld will also start including more budget hotels and other accommodation options on its platform. While that might spur growth, it also takes it further into competition with Airbnb, Booking.com, and others.

Also, global travel demand could always be impacted by another pandemic or some sort of global conflict. So these are risks to bear in mind.

Decent valuation

That said, I like the social network angle, as it’s likely to keep users loyal to the platform. I see a lot of monetisation potential.

More repeat bookings should also reduce marketing spend, which has already fallen from 58% as a percentage of revenue in 2022 to 46%.

Finally, the stock is trading at just 11 times next year’s forecast earnings. Weighing things up, I think Hostelworld is worth considering for investors looking for a cheap small-cap stock.

The post Up 79% in 5 years, this UK travel stock is still a Strong Buy, according to brokers appeared first on The Motley Fool UK.

Hostelworld Group (LSE: HSW) is a youth-focused travel company based in Ireland with a tiny £168.7m market cap. Up by only 2.2%, growth this year has been slow. Yet brokers suddenly decided it was the stock of the week.

I’m on a mission to find out why.

A small player with a far-reaching impact

Although small in size by stock market standards, Hostelworld is wildly popular among the travelling youth of today. It’s one of the largest hostel booking apps in the world, with 16,500 listings in 180 countries globally.

Earlier this week, I noticed three major brokers had put in ‘buy’ ratings on the stock. These were Deutsche Bank on 12 October and Shore Capital and Canaccord Genuity, three days later. For such an unknown small-cap share, that caught my attention. I find it rare for top brokers to tip small-cap stocks.

Positive results

The reason quickly became obvious. On 8 October, Hostelworld released a positive earnings report for the first half of 2024, with net bookings up 9% year on year and an 88% increase in adjusted EBITDA. The company’s social network continues to perform well, contributing to a significant reduction in marketing expenses as a percentage of revenue. Despite a slight decline in average net booking value, it remains confident in its business model and future growth prospects.

This strong financial performance, coupled with its unique market position, is likely a reason for the sudden interest from brokers.

Risks and ratios

The online travel market is highly competitive, with players like Booking.com and Expedia offering similar services. Increased competition could lead to price pressure and reduced market share. Additionally, economic downturns can negatively impact travel spending, leading to lower demand for hostel accommodations. This could adversely affect its revenue and profitability.

Checking like-for-like metrics, Hostelworld appears to outshine Booking.com when it comes to value. It has a trailing price-to-earnings (P/E) ratio of 13.2 compared to Booking’s 29.1 and is undervalued by almost 60%. Booking is only undervalued by 40%. Airbnb, another competitor, has a P/E ratio of 17. 

Furthermore, its balance sheet is squeaky clean, with no debt, €5m in cash, and €62m in equity. Booking.com, on the other hand, is drowning in $16.8bn of debt and has negative equity. Of course, it’s a lot smaller than most of its competitors so these comparisons should be taken with a pinch of salt. On the plus side, low-cap stocks usually have the potential to make larger gains as the price is easier to move.

My verdict

I think Hostelworld, as a leader in a niche market with no debt and strong earnings, could grow to become a key player in the travel industry. There would be some hurdles along the way and unexpected travel disruptions are a key risk to consider.

Overall, I think its prospects look great. If travel continues to grow unhindered, it should have a bright future. Sadly, it isn’t listed on my broker platform yet otherwise I would buy the stock today.

The post Slow growth and no dividends. Why are brokers tipping this small-cap FTSE share as a buy? appeared first on The Motley Fool UK.

Nevertheless, they can be worth noting when there’s a wide disparity between a target and the actual price. It suggests a stock might be significantly undervalued and worth digging into.

One that recently caught my eye was Hostelworld Group (LSE: HSW). The company has a market-cap of £176m, which means it’s classed as a small-cap stock.

On 18 July, broker Canaccord Genuity reiterated its Buy rating on the share and slapped a 247p price target on it. That’s 75% higher than the current price of 141p.

Is this a stock I should consider buying this summer? Let’s explore.

Rebuilding profitability

Many readers will recognise Hostelworld as a leading online platform for booking… hostels. It has partners in over 180 countries.

It’s been a few years since I’ve used the app as I prefer Airbnb and hotels nowadays when travelling. But I remember it as hassle-free and impressive when I used it a couple of times in Europe.

So with Covid restrictions in the rearview mirror and global travel back in full swing, it doesn’t surprise me that 2023 was a record year for the company.

Revenue increased 32% year on year to €93.3m, surpassing pre-pandemic levels. And the firm returned to profitability after the difficult pandemic years, with an operating profit of €5m compared to a loss of €13.6m in 2022. Adjusted EBITDA totalled €18.4m.

In a recent H1 trading update, it said net bookings rose 9% to 3.7m, driven by strong consumer demand for low-cost destinations in Asia and Central America. Adjusted EBITDA surged 88% to €9.6m, while net debt was down to just €2.6m.

Building connections

Now, I’d say competition’s a risk here. Booking Holdings, while primarily focused on hotels, also lists a selection of hostels. And new entrants could always render Hostelworld’s platform obsolete.

Therefore, I fear it may not have a durable competitive advantage (what Warren Buffett calls a ‘moat’).

However, to its credit, Hostelworld’s built a series of data-driven social features that connect fellow travellers. Indeed, it calls itself a ‘social-network-powered online travel agent’. And its mission is to “help travellers find people to hang out with“.

After making a booking, travellers can visit the profile of those staying in their hostel, as well as message others visiting that location. I love this social strategy as it differentiates the platform and makes it stickier.

Moreover, as an asset-light business, Hostelworld benefits from lower operational costs compared to traditional travel agencies. This allows for the rapid expansion of new features without significant capital expenditure.

I can imagine, say, dating features might be very popular among some travellers. And I see a nice opportunity to increase overall platform advertising revenue.

I’m interested

The global hostel market’s expected to expand long term, driven by budget-conscious travellers, particularly among Generation Z. And the company looks perfectly positioned to capitalise on that trend.

Meanwhile, the stock’s trading at 14.2 times forecast earnings for 2024, dropping to 11.3 times next year. That looks good value. I’m considering taking a small starter position in Hostelworld in August.

The post This FTSE small-cap stock could rise 75% says one top broker appeared first on The Motley Fool UK.

Aviva

What it does: Aviva is a market leader in several financial services segments, including life and general insurance.

By Royston Wild. I’ve been seeking ways to boost my dividend income. And Aviva (LSE:AV.), with its 7.6% dividend yield, fits the bill perfectly.

The business doesn’t have a long and unbroken record of payout growth. Unlike, say, Legal & General, Allianz or MetLife, it was forced to cut the dividend during the depths of the pandemic.

But dividends have grown strongly since then, and a Solvency II capital ratio of 206% as of March suggests Aviva has the financial firepower to continue raising rewards. Indeed, City analysts expect dividends to keep moving northwards through to 2026 at least.

One drawback is that the firm has a limited geographic footprint compared to some of its peers. A slimmed-down company with a focus on the UK, Ireland and Canada has limited opportunities to grow earnings compared with its globetrotting rivals.

But I’m confident Aviva will still be able to deliver impressive results as populations in its markets rapidly age.

Royston Wild owns shares in Aviva and Legal & General.

Burberry

What it does: Burberry operates within the global personal luxury market, with a presence in over 140 countries and territories around the world.

By Andrew Mackie. The Burberry (LSE: BRBY) share price has had a miserable 12 months. It’s down a whopping  55%, and languishes at levels not seen since 2016. With sentiment in the stock so low, I couldn’t resist adding some shares to my ISA portfolio in the last week.

It’s not hard to see why the company has struggled. In the US, a key market, pandemic-fuelled stimulus payments have long been spent, and elevated inflation has altered the spending patterns of even affluent consumers.

However, ultimately, I see these challenges as relatively short-term. After all, this is an iconic British brand that traces its roots back to the 1850s.

Its core business strategy of building what it describes as a new “creative expression” is, I believe, the right one. In a crowded marketplace, brand marketing is likely to become a clear differentiator. Its one-month takeover of Harrods, together with a new animation of the famous Burberry Check, are but two examples.

I have not invested in the expectation of an instant turnaround. But taking a contrarian stance is in my DNA.

Andrew Mackie owns shares in Burberry.

Burberry Group

What it does: Founded in 1920, the FTSE 100 group makes luxury British clothing, bags, accessories and fragrances, and is best known for its trenchcoats and cashmere scarves.

By Harvey Jones. I’d wanted to buy shares in Burberry Group (LSE: BRBY) for years, but I’m glad I didn’t. They’ve crashed 54.63% in the last 12 months, the second worst performer on the FTSE 100 after St James’s Place. 

And that’s when I swooped.

I love buying shares as a big discount, especially when they’re paying much higher income as a result. Burberry’s trailing yield is now a thumping 5.87%.

I didn’t catch the share price right at the bottom, but came pretty close.

However, in the race to bag a bargain, I underestimated what a mess management has got itself into.

Sales have slumped in China. Ad campaigns have backfired. The famed Burberry check is not as aspirational as it was. Fashionistas just aren’t that into it.

So here’s what I’m going to do. Sit tight and wait. Reinvest my dividends. Be patient. I bought Burberry shares at a reduced price and I’m confident they’ll come good. Given time.

Harvey Jones owns shares in Burberry.

Diageo

What it does: Diageo is in the spirits business. It makes some of the best-selling products in a number of categories.

By Stephen Wright. Even the best businesses find their share prices under pressure from time to time. Diageo (LSE:DGE) is a good example of this at the moment. 

A falling share price means the stock trades at a price-to-earnings (P/E) ratio of around 18 and the dividend yield is above 3%. That’s unusually cheap by the company’s standards.

The concern is that rising interest rates might cause a durable shift away from the premium drinks that make up the bulk of Diageo’s portfolio. But I think investors are overreacting. 

Sales of Guinness have been holding up well in a difficult environment, which illustrates the resilience of the overall product lineup. And a cut in interest rates looks to be getting closer.

If that happens, I expect the stock to rally from its current levels. That’s why I’m buying as much as I can with the price where it currently is.

Stephen Wright owns shares in Diageo.

Hostelworld

What it does: Hostelworld is an online accommodation booking platform that focuses on the hostel market.

By Christopher Ruane. Hostelworld (LSE: HSW) seems to have put the difficult pandemic years firmly behind it.

The budget accommodation booking platform generated record revenue last year. Operating costs continued to decline as a percentage of that revenue, something I think shows the economies of scale an online platform can achieve as marginal costs decline.

It swung back into the black, reporting an after-tax profit of €5.1m. That puts it on a price-to-earnings ratio of 45, which looks expensive. However, if the business continues to perform strongly, I think earnings growth could outstrip revenue growth due to the platform’s scalability.

The company says 2024 began with “strong momentum”. Several directors dipped into their own pockets last month to buy shares.

The threat of a sudden unexpected downturn in travel demand, as we witnessed during the pandemic and its associated government-imposed restrictions, remains a key risk for Hostelworld. But I like its strong, niche position and the economies of scale its business model offers.

Christopher Ruane owns shares in Hostelworld.

Legal & General

What it does: Legal & General is a financial services and asset management company. 

By Ben McPoland. I added to my holding in Legal & General (LSE: LGEN) after shares of the insurer fell 7% in mid-June. The drop came after the new CEO set out plans to restructure the business into three core units and increase shareholder returns between 2024 and 2027.

Specifically, the firm announced a £200m share buyback and 5% dividend growth for 2024, followed by 2% growth per year alongside further share repurchases. It’s aiming for 6%-9% compound annual growth in operating earnings per share over these three years.

The market either didn’t think this was ambitious enough and/or wasn’t happy with the reduced dividend growth starting in 2025. Personally, I’m encouraged that management committed to the payout as well as international growth, particularly in the US.

Seeking out business opportunities overseas does come with execution risk, of course, and much more competition. But it’s a risk worth taking to potentially reignite growth, in my opinion.

After the share price dip, the stock is offering a massive 9.4% forward dividend yield (as I write). I found that too tempting to turn down. 

Ben McPoland owns shares in Legal & General.   

Pinterest

What it does: Pinterest is an American social media platform that focuses on image sharing and idea discovery.

By Muhammad Cheema. After rising by 82% over the last year, is it too late to buy Pinterest (NYSE:PINS) shares? Well, I’m betting it isn’t after recently adding to my position.

The company has experienced a rollercoaster of fortunes since it went public in 2019. Initially, growth soared when the pandemic struck. But it subsequently decelerated when global economies began reopening.

However, high growth has been resurgent as of late as the company has focused on making its site more shoppable. For example, recent quarterly revenue increased by 23% year on year while monthly active users hit a new high of 518 million, growing by 12% over the same period.

When it has competitors, such as Meta, who have been accused of copying its rival’s ideas, there is a risk. However, this isn’t a big concern as other social media platforms, such as TikTok, and Instagram are seen as somewhat controversial. Pinterest on the other hand isn’t, which should help it maintain its competitive edge in its niche.

Muhammad Cheema owns shares in Pinterest.

Sage 

What it does: Sage is a provider of cloud-based accounting and payroll solutions with a focus on small- and medium-sized businesses. 

By Edward Sheldon, CFA. Sage (LSE: SGE) shares have experienced quite a large pullback lately and I’ve been buying on the dip, boosting my holdings. 

This is not a cheap stock, even after the recent pullback. However, to my mind, it has the potential to generate strong returns over the next five to 10 years. 

As a provider of cloud-based accounting software, Sage is very well positioned to prosper from the digital transformation trend going forward. As companies move away from old-school accounting processes towards cloud-based software, it should benefit. 

But that’s not the only reason I’m drawn to the company. I also like the fact that it has a high level of recurring revenues and a high return on capital (a key measure of profitability). Generally speaking, companies with these attributes tend to be good long-term investments. 

One risk with this stock is an economic downturn. This could hurt smaller businesses and lower demand for accounting software.  

Taking a long-term view, however, I think Sage shares should do well for me. 

Edward Sheldon owns shares in Sage.

Scottish Mortgage Investment Trust

What it does: Scottish Mortgage is a Baillie Gifford fund that aims to own the most exciting growth companies across the world.

By Charlie Keough. With it down over 40% from its all-time high, I decided to open a position in Scottish Mortgage Investment Trust (LSE: SMT). It’s a stock I’ve had on my watchlist for a while. There are a few reasons why.

Firstly, its shares look cheap. The trust trades on a 10.3% discount to its net asset value. That makes Scottish Mortgage look like good value for money at £9.97 a share. With nearly 100 companies in its holdings, I’m also a massive fan of the diversification it offers.

There are a few risks. To begin, 26.2% of its portfolio consists of private companies. Valuing these businesses can sometimes be difficult. What’s more, with a heavy focus on growth stocks, any signs of a delay in rate cuts could negatively impact its price.

But just like me, management invests for the long term. The trust has been gaining momentum recently. It’s up 13.8% this year already. I’m hoping it can keep up this form going forward.

Charlie Keough owns shares in Scottish Mortgage Investment Trust.

Zscaler

What it does: Zscaler is a Californian cybersecurity company that offers cloud security services to enterprise businesses.

By Mark David Hartley. I recently bought shares in Zscaler (NASDAQ: ZS) as part of a broader portfolio aimed at profiting from the artificial intelligence (AI) boom. With a heavy reliance on cloud-hosted databases, artificial intelligence has created a huge demand for cloud security. As an IT professional, Zscaler’s ‘zero-trust’ approach to cybersecurity appeals to my personal beliefs and understanding of how this technology should operate.

But it’s not alone in the industry. ZScaler faces tough competition from larger and more established players like Palo Alto Networks and Fortinet. At 13.7 times, its price-to-sales (P/S) ratio is significantly higher than the industry average of 4.3. It will need to seriously up its sales if it hopes to meet investor expectations, or shares could fall soon. Still, analysts are positive, with good consensus on a 12-month price target 25% higher than currently. If AI doesn’t end up killing us all, it might pay off.

Mark Hartley owns shares in Zscaler.

The post 10 stocks that Fools have been buying! appeared first on The Motley Fool UK.

Creo Medical Group

What it does: Creo Medical manufactures instruments used in minimally invasive endoscopic surgery.   

By Ben McPoland. I reckon Creo Medical (LSE: CREO) stock has the potential to rise much further. In 2023, the medical device company is expected to have grown its revenue 13% to around £31m.  

In 2024 though, its top line is forecast to accelerate to around £40.6m as more surgeons are trained to use its Speedboat product. This versatile electrosurgical device is saving certain NHS hospitals a fortune as part of their bowel cancer and endoscopy services.

According to the company, Speedboat technology has helped drive an 87% reduction in the average length of stay from 8.39 days to 1.07 days. Over a one‐year period, costs were reduced from £8,800 per patient to £3,600 (a 59% reduction). 

Now, one thing holding the stock back is a lack of profitability. Creo is still loss-making, which adds risk to the investment case here. However, it expects to reach cash flow break-even in 2025, with profits following after.

If it can achieve this while still growing revenue by double-digits, then I think the share price can explode higher from this point. That’s 34p, as I write. 

Ben McPoland owns shares of Creo Medical. 

Eagle Eye Solutions Group

What it does: This tech company specialises in personalised digital marketing, offering a third-party-integrated platform.

By Oliver Rodzianko. Eagle Eye Solutions Group (LSE:EYE) seems to be offering advanced and personalised marketing solutions at just the right time. With artificial intelligence (AI) now being adopted by the mainstream, the desire for unique promotions will become the new standard. Eagle Eye is one of the firms leading in providing this.

One element that stands out to me regarding its financials is that it holds no typical debt and has only a moderate amount of other liabilities like accounts it owes. That lays the foundation for a solid investment, in my opinion.

It’s worth bearing in mind that Eagle Eye faces competition from some leading companies like Salesforce Marketing Cloud, Adobe Experience Cloud, and Cheetah Digital. It’s going to have quite a challenge on its hands in remaining competitive in AI with the bigger players. Nonetheless, Eagle Eye has still bagged customers like Asda, Pret, and Halfords so far.

Oliver Rodzianko owns shares in Salesforce.

Hostelworld

What it does: Hostelworld is a booking platform that focuses on hostels, in a large variety of tourist destinations worldwide.

By Christopher Ruane. If you try and book a hostel in most of Europe for this Summer, you’ll notice a few things. Availability is often tight – and prices are typically much higher than they were a few years ago.

Travel demand remains high, which is good for accommodation booking platforms in general. But the comparatively low cost nature of many of the sleeping options listed by Hostelworld (LSE:HSW) could mean that bookings stay strong even if an economic downturn hurts the higher end of the industry.

Revenues are soaring: Last year they increased 33% and surpassed pre-pandemic levels.

The company is profitable again after a few years of heavy losses. Net debt fell sharply last year to €12.3m.

The business model is simple and the low marginal cost of expansion is attractive. The pandemic era showed that a sudden slump in demand can see revenues collapse. But Hostelworld has bounced back and I think looks set for ongoing growth.

Christopher Ruane does not own shares in Hostelworld.

Porvair

What it does: Porvair makes specialist filtration equipment for aerospace, life sciences, and metal melt applications.

By Stephen Wright. With a market cap of £282m, Porvair (LSE:PRV) is the smallest company I own in my portfolio. But I rate its growth prospects extremely highly.

The company has a couple of different sources of growth. The first involves making more money in its existing operations and the second is through acquisitions.

Porvair operates in industries where competition is limited – or sometimes non-existent. That gives the company an ability to raise prices incrementally. 

There are also opportunities for growth by acquiring other companies. This can be risky, but Porvair’s size means it should have plenty of opportunities.

The company’s end markets are also cyclical, which is another risk. Aerospace turned down during the pandemic and healthcare inventories have been at elevated levels since.

Despite this, I bought the stock recently because I think it’s well worth the 17 times earnings the stock trades at. And I plan to continue doing so in the future.

Stephen Wright owns shares in Porvair.

Renold 

What it does: Renold is an international supplier of industrial chains and related power transmission products.

By Edward Sheldon, CFA. Right now, there are lots of small-cap stocks with explosive growth potential. However, one I want to highlight is chain and gear manufacturer Renold (LSE: RNO).  

There are several reasons I’m bullish on this stock. One is that it looks very undervalued at present. Currently, Renold has a price-to-earnings (P/E) ratio of just six. Considering that the company has a near-record order book, and that profits for the year ended 31 March 2024 are expected to rise 27%, that valuation strikes me as way too low.

Another is that around 40% of the company’s revenues come from the US. Given that the construction industry in the US is booming right now due to infrastructure spending, I think there’s potential for future results to be better than expected. 

Now, it’s worth pointing out that Renold has some debt on its balance sheet. This is not ideal in a high-interest-rate environment. 

At the current share price and valuation, however, I think the risk/reward setup looks quite attractive. 

Edward Sheldon has no position in Renold 

The post 5 small-cap stocks Fools think have explosive growth potential appeared first on The Motley Fool UK.