We all know that investing in a company simply because its shares are trading at a low price would be a very foolish strategy. A firm’s stock may be cheap due to it having a very large number of shares trading on the market, thereby diluting the value of each individual one, or simply because the company in question is a smaller firm with a relatively modest market value.
On its own, a company’s share price doesn’t really mean much, and as we already know, cheap doesn’t necessarily mean good value. However, today I’ve unearthed two small-cap stocks that not only trade at a low price, but I believe also represent great value given their long-term prospects.
Market-leading recruiter
Robert Walters (LSE: RWA) is one of the world’s leading professional recruitment consultancies, specialising in the placement of permanent, contract, and temporary positions, across all levels of seniority. Established in 1985, the £430m group recruits across the accounting, finance, banking, IT, human resources, legal, sales and marketing, supply chain, procurement, engineering and support fields.
Last week the London-based firm raised its full-year profit forecast for a second time after delivering another quarter of record results. In a trading update for the third quarter ended 30 September, the group delivered a 22% increase in net fee income to £90.7m, with all geographical regions contributing to the strong growth.
Ahead of expectations
Here in the UK, net fee income rose to £26.9m, a 15% improvement year-on-year, with St Albans and Manchester the standout performers. In London, activity levels were highest across technology and legal recruitment. As a result, management is now confident that pre-tax profits for the full year will be ahead of market expectations.
At almost £6, Robert Walters’ shares are trading close to all-time highs, and 46% up on my original buy recommendation in June. But at 18 times forward earnings, I still believe the shares offer further growth over the medium and longer term.
Europe’s largest distributor
Meanwhile, another low-priced small-cap stock that’s recently hit all-time highs is Headlam Group (LSE: HEAD). As Europe’s largest distributor of floorcoverings, the business is engaged with suppliers across 16 countries whose products cover a significant proportion of the floorcoverings market (including carpet, residential vinyl, wood, laminate, luxury vinyl tile, underlay and commercial flooring).
The Birmingham-based group still generates the vast majority of its revenues here in the UK. And earlier in the year it implemented price increases to mirror rising costs levied by suppliers as a consequence of the weakness of sterling and the upward movement in raw material prices. But I’m not overly concerned, as the demand for floor coverings tends to be inelastic to price increases, and the business should continue to deliver steady growth regardless.
Despite reaching all-time highs earlier in the year, I still rate the shares a ‘buy’ as they are trading on a not-too-demanding earnings multiple of 15 for the current year to December, and offering an attractive yield in excess of 4%.
