If you’re looking for fast gains in the stock market, it pays to look outside the FTSE 100. The UK is home to a number of really exciting small-cap companies, many of which are generating sensational returns for investors. Here’s a look at two companies you can’t afford to ignore.
Discoverie
Formerly known as ACAL, £301m market cap Discoverie (LSE: DSCV) designs, manufactures and distributes customised electronic products and solutions to businesses across a range of industries. Since I last covered the stock in mid-October, it has risen over 20%. In a year, it’s surged over 60%. The trend here is clearly up. Are there more gains to come?
A trading update released today sounds good, in my view, even if the stock has fallen a few percent this morning. The group advised that, since its last update on 31 January, trading has continued well, with full-year earnings likely to be in line with management expectations, reflecting “strong growth in year-on-year profitability.”
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Group sales for the year ending 31 March increased 11% on a constant currency basis, including organic growth of 6%. The Design & Manufacturing division, which generates around 75% of the group’s profits, enjoyed organic sales growth of 11% for the year. The firm advised that group gross margin “continues to strengthen,” and that the order book at 31 March was at a record £122m, 12% higher than last year.
Despite the rise in the share price over the last year, Discoverie’s valuation remains attractive. City analysts expect the group to generate earnings of 24.9p per share this year, which places the stock on a forward-looking P/E ratio of 16.3. A P/E to growth ratio (PEG) of 1.4 suggests that’s a fair price to pay for the growth being generated. Furthermore, a prospective dividend yield of just over 2% adds weight to the investment case. I rate Discoverie as a ‘buy’ at current levels.
First Derivatives
Another hot small-cap stock that investors can’t afford to ignore is big data specialist First Derivatives (LSE: FDP).
Big data refers to the vast amounts of data that businesses generate on a day-to-day basis. Processed and analysed appropriately, it can provide businesses with valuable insights that can improve efficiency and boost profitability. With data volumes growing at an exponential rate, big data is big business, and with its proprietary Kx data analysis software, First Derivatives looks well placed to capitalise. The firm has a long history of working with some of the world’s largest financial institutions, yet is now branching out to others sectors. In February, it signed a deal with a FTSE 100 gaming company to provide data analytics services. The opportunities here are vast. Is now the time to buy the shares?
First Derivatives had a sensational run last year, rising around 100%. When I last covered the stock in late January, I noted that it looked a little expensive on a forward P/E of 64, and said that it might be worth waiting for a pullback. That call was good, as the stock recently fell around 20% from its January high. However, the share price has since stabilised, and I believe it could now be time to take a closer look. The shares are still expensive, on a forward P/E of 49.7, yet the long-term potential here is significant.
