There’s a lot of hidden gems to be found in small cap stocks. There’s a few key reasons why:
- There is much less information available on small cap stocks as they aren’t given as much coverage.
- Big funds can’t hold a lot of them because they need to be able to deploy large amounts of cash – and don’t want to end up holding a large chunk of a company.
These two dynamics means there is a more level playing field allows ordinary investors to pick up under-analysed bargains.
Here are 4 AIM-listed stocks that we really like:
1. Wameja (WJA)
Founded in 1991 in Sydney, Australia, Wameja Limited (previously eServGlobal) is a small cap company listed on the AIM that is partaking in the fintech wave.
Wameja’s main venture is their HomeSend global payment hub which allows cross-border transfer between mobile money accounts, payment cards, bank accounts, and cash outlets.
It gets more interesting. Their partner in this venture is Mastercard, which is set to acquire Wameja this year, propelling the share price upwards in recent months.
The HomeSend global payment hub does not compete with banks, it complements and facilitates the services that banks offer.
Wameja packs a market cap of £82.27m, placing it squarely in the small cap category in today’s world of crazy valuations. Just as a somewhat unfair comparison, take Western Union, which is also in the business of money transfer around the world and has a market cap of $10.15 billion.
It’s clear that Wameja really is a smaller contender in the money transfer space. But this smaller size makes it an acquisition target by the giant that is Mastercard.
The company is not profit-generating, with pretax loss for 2020 falling to £5.3m, from £5.9m the year before. This is due to reduction in administration costs and restructuring costs.
The bullish case on Wameja is that Mastercard is looking to acquire, though the acquisition has been in the works for a while and has undergone some teething problems which need to be resolved.
Cross-border payments is a massive industry, and in 2018, for example, there was a 4% growth in revenues generated from this market to provide companies $230b in revenues. This is only set to increase in an increasingly global world.
The bearish case is of course that this space is becoming increasingly saturated. In addition to more entrants into the market, new technologies from neobanks and fintech, and now blockchain and DeFi means that eventually older technologies utilised by banks may be deemed inefficient as time goes on.
Because Wameja facilitates cross-border bank transactions, its fate is tied to the offerings of banks.
2. Serica Energy (SQZ)
Serica Energy is an upstream oil and gas company focussed on the North Sea. The company has been around for almost two decades, but in 2017 it acquired a few oil and gas fields from BP, transforming it into a mid-tier producer.
Over 80% of Serica’s production is gas which is then used by the UK for electricity generation.
Serica is fully focussed on expanding its North Sea production, with their team growing from 7 people to over 150 since their 2017 deal. All this expansion and the company is totally debt free.
Serica’s market cap sits at £308.1m, making it a small and upcoming player in an industry where giants like BP boast a market cap of $89b.
Serica has had phenomenal growth after its 2017 deal with BP, and with a PE ratio of 6.61 it is not expensive!
Serica is a company that has made sound financial decisions. They prioritised cashflow and profit and ensured they had no debt.
Interim results in September showed a total revenue of £46m leading to £20.4m of gross profit with £19.3m of cash flow.
Finally, investors will be happy to know that in July 2020 Serica paid its first dividend as a profitable business. A total pay-out of £8m, at 6p per share (a yield of 5.22%), demonstrates Serica’s strong financial position.
Gas is seen as an important transition fuel in an industry that is slowly going green. With 80% of its portfolio, Serica is well positioned to take advantage of its financial prowess to make acquisitions to bolster its portfolio.
Responsible management and a sustainable growth outlook, Serica seems to be a very sensible small cap investment for a healthy return.
The bearish case is that Serica’s long-term prospects in an increasingly climate-aware world are limited. Clean energy is where all the cash is flowing to, and the UK, Serica’s customer, has a huge commitment to go green.
3. Oxford Metrics (OMG)
Founded in 1984 in Oxford (hence the name), Oxford Metrics is a software company that develops and markets analytics software for motion measurement and infrastructure asset management.
Based in the UK, the company has clients in over 70 countries around the world.
With a diverse range of services, from helping hospitals decide on therapeutic strategies, to helping highway authorities manage and maintain road networks, to aiding Hollywood in visual effects, Oxford Metrics has a diverse client portfolio in various industries.
With a market cap of £120.1m, Oxford Metrics sits firmly in small cap territory.
The company saw consistent revenue growth from 2016 to 2019, going from £26.3m to £35.3m.
Unfortunately, 2020 saw this drop to around £30m. The good news is that with a 10% uptick in annual recurring revenues, the company seems on track for a healthier 2021.
As a software company with a lot of potential growth in its life, it has a PE ratio of 73, meaning it’s definitely not priced cheaply! But with software companies you pay a higher price for more projected growth.
One should still invest with caution, especially when the industry average PE sits at 49.2.
The company isn’t purely in a growth phase though, having been originally founded in 1984, the shares have a dividend yield of 1.89%, rendering a 2p per share dividend.
As more and more countries and industries turn the data ‘switch’ on and start harnessing the power of metrics and data, the industry will only continue going up.
With the age of smartphones, smart cars, and the Internet of Things, everything will be connected to the internet and everything will produce data. So the industry Oxford Metrics finds itself is growing quickly.
Even the motion measurement side of the business will boom thanks to virtual reality and medicine.
Of course, this growth in the industry is a double-edged sword. Oxford Metrics is hunting for profits in an increasingly crowded marketplace and will face fierce competition now and in the future.
It is already priced above the industry average and with a (somewhat understandably) lacklustre 2020, investors should monitor and hope 2021 activity keeps up with the price of the company.
4. Volex (VLX)
Volex designs, manufactures, and supplies power-related products (such as power cords and cable assemblies) to various industries, including the medical, data networking, and the increasingly growing electric vehicle, sectors.
The company was founded in 1892! From a suburb in Manchester, Volex has spent over a century crafting its image as a now international brand.
It has two sides to its business:
– Integrated manufacturing service for designing and producing various products (such as cable assemblies and connectors).
– Mass production of electrical products sold directly to manufacturers (such as power cords and adapters for laptops and electric vehicles).
A small cap valuation of £524.5m leaves Volex as an overlooked stock due to lack of analysis and lack of big money.
Volex isn’t overpriced, with a PE ratio of 23.86. A noteworthy competitor that also manufactures electronic systems in various sectors is XP PowerLimited, which trades at a market cap of £936.9m with a PE ratio of 29.76.
Volex has seen decent revenue growth in the past few years, growing from $319.5m in 2017 to $391.3m in 2020.
As a mature company with a good growth runway, Volex has a small dividend of 3p per share, a yield of 0.93%.
The consistent growth in its revenue shows that Volex is tapping into more markets and is becoming more of an international brand.
It’s exciting to see the company tap into markets that are going to grow exponentially, such as electric vehicles.
The basic electric cord technologies that Volex specialises in are not going away any time soon and the market is only set to grow, especially with a push to electrify everything and rely less on fossil fuels.
Volex will have to stay on top of the development taking place in this fast-moving industry though. With regulation that can change rapidly in a more climate-conscious world, Volex must be able to adapt or lose to a market that has many competitors.
As you guys can see, the small cap world has some absolute bargains that give an advantage to the retail investor.
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