I like to think I include myself in this group. And as luck would have it, the share price of one of my most coveted stocks is back down to levels not seen since the immediate aftermath of the March 2020 market crash.

Selling pressure

Set up in 2003, Farnham-based biotechnology firm Bioventix (LE: BVXP) specialises in the commercial supply of high-affinity monoclonal antibodies for applications in clinical diagnostics. In other words, these antibodies are used in blood testing machines in hospitals across the globe.

As a long-term hold, BVXP has been an absolute winner. As I type, the share price has climbed just under 1,000% in a little over eight years.

So far, however, this AIM-listed growth stock is having a poor 2021. The shares have retreated almost 24% year-to-date thanks to the brute that is Covid-19. With hospitals needing to prioritise treating the infected rather than diagnosing people for other things, it’s perhaps inevitable that profits have slipped. To compound the issue, fearful patients aren’t even reporting symptoms to doctors. 

So, the shares are cheap?

Not exactly. In fact, I imagine a fair few growth-focused investors would balk at the asking price (26 times earnings). However, I think this could prove to be a great contrarian opportunity for me for a few reasons.

First, BVXP scores extremely well on quality metrics such as returns on capital employed (ROCE) and operating margins. The former is something that star investors like Warren Buffett and Terry Smith pay a lot of attention to. Over time, it’s a company’s ability to reinvest the money it makes at a high level of return that separates the wheat from the chaff. 

Second, Bioventix is backed by some of what I consider to be the best fund managers in the business. No less than 20% of the company is held by star stock-picker Keith Ashworth-Lord in the CFP SDL UK Buffettology fund. Liontrust Investment Partners also owns a sizeable stake. Most importantly, Bioventix’s CEO Peter Harrison remains high up on the share register. Theoretically, the more willing management is to put its own cash at risk, the more likely it is to act in the interests of all shareholders.

Finally, there’s the balance sheet. With zero debt, Bioventix looks financially robust — the antithesis of many UK-listed companies right now. 

But what if Omicron sticks around?

It’s a fair question. The longer the pandemic goes on and resources are diverted elsewhere, the less near-term demand there is for Bioventix’s antibodies. Earnings could therefore continue to suffer in 2022.

Having said this, I do see Bioventix’s fall in 2021 as an opportunity to begin building a position at the very least. The shares could recover nicely if next year proves even slightly better than health and economic experts are currently predicting.

And if BVXP does stay down for longer than I expect it to, the dividend stream should make up for this. A potential 115p per share handout becomes a yield of 3.4% at the current share price.

As far as growth stocks go, I think there are a lot worse candidates out there.

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Paul Summers owns shares in the CFP SDL UK Buffettology fund. The Motley Fool UK has recommended Bioventix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This new approach to developing medicines from living organisms rather than chemical bases has allowed the pharmaceutical industry to make giant leaps. But its uses are not limited to just medicine. Biotechnology companies have developed pest-resistant crops, biofuels for vehicles, and even gene cloning.

This diverse range of applications and continual discoveries have created an enormous opportunity for these two biotech companies, in an industry expected to reach $500bn by 2026.

Oxford Biomedica – A hidden industry leader?

Oxford Biomedica (LSE:OXB) specialises in gene and cell therapy. This segment of the biotechnology sector is relatively new, with only eight FDA-approved treatments on the market today. However, by 2025 it’s expected that 10-20 new therapies will be approved — every year.

Why do I think Oxford Biomedica is a leader? It’s simple. Developing gene and cell therapies is a costly process that most pharmaceutical companies would deem too risky to pursue. However, this stock has developed a proprietary platform called LentiVector.

It allows Oxford Biomedica to utilise its expertise to assist large pharma companies in developing new drugs. The firm charges bioprocessing and development fees for clients using the platform. This approach to drug development is considerably cheaper for clients and subsequently reduces the investment risk.

Attracting the likes of Novartis and Bristol Myers Squibb, the platform has become a centre point for bio-drug development. What’s more, is even after completion and approval of a new treatment, Oxford Biomedica continue to receive royalties from each sale. Needless to say, this business model creates an incredible stream of recurring revenue and cash flow – a key requirement for explosive returns.

Bioventix – An industry diagnostics expert

Bioventix (LSE:BVXP) operates in a different segment of the industry. It designs and manufactures specialised antibodies for blood testing machines. Today blood tests are used to diagnose almost every disease — including Covid-19.

This continual rise in demand has drastically increased the price of antibodies. To put it in perspective, Bioventix currently sells between 10-20 grams each year at around £4m.

Currently, the supply does not meet the demand, and while this won’t be the case forever, it may not matter over the long term.

Just like Oxford Biomedica, Bioventix works directly with large pharma companies to sell or develop new antibody solutions. The firm also continues to receive royalties on each subsequent sale of a product designed with its antibodies. Almost 70% of the revenue stream originates from these multi-year royalty payments.

Growth stocks with a recipe for explosive returns?

With one business diagnosing the problems, and the other finding treatments, they capture a large portion of the industry pipeline. Combined, the companies amount to a $1.12bn market cap, thus there is a lot of room for growth.

I’ve owned shares in Oxford Biomedica for many years, and recently I’ve bought more. Bioventix is a far smaller company, but it’s looking ever-more promising in my eyes. Fused in one portfolio, I believe these biotech growth stocks have the potential to create explosive returns for myself and other shareholders.

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Zaven Boyrazian owns shares in Oxford Biomedica. The Motley Fool UK has recommended Bioventix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The opportunity 

Bioventix (LSE:BVXP) is a biotechnology company that specialises in manufacturing antibodies for blood testing machines. Hospitals around the world use its products to help diagnose heart disease, thyroid problems, fertility issues, cancer, and a plethora of infectious diseases.

Unlike other antibody creation labs, Bioventix uses a proprietary sheep monoclonal antibody (SMA) technology that far out-performs the competition.

The business has two revenue streams.

The first is the manufacture and distribution of its SMAs to in vitro diagnostics (IVD) companies around the world – such as Roche Diagnostics, Siemens Healthineers, and Abbott Diagnostics.

Currently, the company sells around 10–20 grams of the purified antibodies each year. Needless to say, it’s an expensive material.

The second source of revenue is from royalties. Whenever a client sells a diagnostic product that uses SMAs to their downstream customers, Bioventix receives a modest royalty. As it stands, these agreements generate approximately 70% of the company’s annual revenue.

This unique approach to business results in an ongoing source of money from its clients, after the sale of the product.

It also partakes in contract antibody creation programmes. Other companies pay Bioventix to develop a new antibody for exclusive use. The process typically takes one year. Once completed, the firm once again continues to receive royalties from each sale.

The financials 

The latest results from June 2020 revealed continued revenue growth of 11%. At first glance, this appears to be a slow-down from previous years. However, Covid-19 did cause disruptions to the routine of the global IVD market that resulted in a 15%–20% reduction in activity.

A diverse portfolio of antibodies drives the royalty revenue. Although, it is worth noting that the royalty agreement for NT-proBNP, which currently represents 13% of annual revenue, is set to expire in July 2021.

There are plenty of other products generating royalties ready to replace it. However, the loss of income may have a notable impact on 2022 annual revenue.

One of the best shares to buy now?

The highly regulated pharmaceutical industry is both a blessing and a curse. Regulators have already approved the SMAs, but not the products of its clients. Seeking approval is a very lengthy process that can take up to a decade of tests and trials.

This delays the royalties Bioventix is set to receive from its contract antibody creation programmes. To put this into perspective, the projects being developed today likely won’t yield royalty revenue until 2025–2035.

On the plus side, the long and expensive path to approval grants a significant competitive advantage. The process creates a large barrier to entry for competitors as they would have to pursue regulatory approval themselves. 

In my opinion, this form of competitive edge is a rare to come by. Whether they are the best shares to buy now is a personal decision, but Bioventix is definitely on my list as a possible addition to my portfolio.

The post Looking for shares to buy now? 1 biotech stock I’d buy today appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Bioventix. The Motley Fool UK has recommended Bioventix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

By sharp contrast, the valuations of some UK companies have bounced to such an extent that March appears as a mere blip on their respective charts. 

Here are three examples that caught my eye.

Pets at Home

Due to “exceptional levels of demand” from pet owners over the last few weeks, retailer Pets at Home (LSE: PETS) has outperformed. Underlying pre-tax profit for the full year is expected to come in “slightly above the top end of the range of current market expectations.” As such, it’s probably no surprise its share price has galloped back to where it was only a few weeks ago. 

Can this positive momentum continue? It’s a tricky one. Having already closed its grooming salons, Pets now expects lower revenue from its vet practices and stores as people only make a trip if absolutely necessary.

Given the company has reported customers “pulling forward purchases,” you have to consider the possibility many owners have already stockpiled enough food for their furry friends should the lockdown be extended.

With no guidance for the next financial year issued, it’s understandable if prospective investors are still reluctant to buy. Nevertheless, the defensive nature of its industry surely makes Pets a far safer bet than other stocks in the FTSE 250. 

CMC Markets

Online trading provider CMC Markets (LSE: CMCX) is another firm that’s seen its share price recover. Actually, that’s something of an understatement. It’s now higher than before the coronavirus pandemic struck. 

This all feels very logical, given CMC benefits from periods of market volatility. Indeed, recent numbers suggest business is booming. More clients are signing up to use its platform (or logging back in). So the small-cap now expects full-year trading revenue from its main CFD business to be around £214m. This is almost double what it generated in FY19.

Markets are likely to remain jittery for the foreseeable future. But I think those buying now could still make decent gains. Having said it would retain its policy of paying out 50% of post-tax profit to its shareholders, CMC looks a relatively safe bet for income investors too.

Bioventix

Last, but not least, we have antibody developer and supplier Bioventix (LSE: BVXP). While unrelated to the current crisis, last week’s set of interim results helped explain why its share price has now returned to levels seen in February. 

Revenue and pre-tax profit jumped 21% and 31% respectively over the six months to the end of December. In addition to this, Bioventix saw fit to raise its interim dividend by a cracking 20%, to 36p per share.

The near-term outlook was also reassuring. A reduction in some diagnostic testing might impact earnings. But Bioventix expects to continue supplying antibodies to customers in countries affected by Covid-19. This makes sense given that healthcare services have now been prioritised.

The only slight concern for me is the company’s small workforce (16 people). This could become stretched if government guidelines on how companies should operate are modified. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Bioventix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Quality…at a price

I can’t pretend to understand the science behind what small-cap Bioventix (LSE: BVXP) does in much detail, apart from saying that it develops and supplies antibodies for use in the diagnosis of conditions such as heart disease, cancer and drug abuse. What I can tell you is that it’s a first-class business, generating absolutely huge operating margins and returns on capital employed — the latter being just the sort of thing one of the UK’s most successful fund managers looks for. Based on its half-year report issued at the end of March, I shouldn’t think there’ll be much to worry about when the Farnham-based firm reveals its latest full-year numbers on 21 October.

Back in March, the company revealed 24% rises in both revenue and pre-tax profit (to £4.4m and £3.2m respectively). Its balance sheet remained strong with a closing cash balance of £5.5m. While far from being an income play, an interim dividend of 30p per share was also declared — 20% higher than at this time last year; not bad for an organisation with just 15 employees.  

Pretty much the only issue with Bioventix at the current time is the price of its stock. At a little less than 33 times earnings, the market is already expecting a lot. Should markets head southwards over the next month or so as a result of Brexit jitters, I’ll be in the queue to pick up a slice of this quality small-cap. 

Buy the dip?

Another growth stock that’s likely to be flying well under the radars of most retail investors is audio-visual specialist Midwich (LSE: MIDW). Its services include providing huge LED screens for a variety of clients and events. 

Trading over the first half of 2019 was encouraging, with this month’s interim results revealing a 19.2% rise in revenue to £314.8m and a 6.2% rise in adjusted pre-tax profit to £13.7m. 

In addition to this, there was a 5.4% increase to the interim dividend and news that acquisitions in the previous financial year were bedding in nicely. Indeed, these purchases, combined with three others over the first half of 2019, have helped to increase gross margin and open new markets for the company. 

In terms of share price performance, however, Midwich hasn’t exactly set the market on fire. Indeed, it’s been rather volatile over 2019, rising as high as 633p back in April only to fall back to the 500p mark over the summer.

That said, this company’s value is still well over double what it was five years ago. What’s more, the recent dip in form leaves the shares looking reasonably valued at 16 times earnings, especially when it’s considered that Midwich achieves consistently great returns on capital and is expected to yield 3.1% in the current year (with the payout covered twice by profit). The fact that it has operations in Europe and Asia Pacific as well as across the UK and Ireland should give it some degree of protection from any Brexit fallout. 

Again, like Bioventix, I’ll be sorely tempted to open a position if Midwich drops a bit more over the next few weeks/months. It’s on the watchlist for now.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

While the past is certainly no guide to the likelihood of more success in the future, here are two that have caught my eye recently.

Star performer

I’d bet that most retail investors haven’t heard of £180m cap, AIM-listed Bioventix (LSE: BVXP). Assuming the company is able to continue performing as it has over the last few years, however, this could be all set to change. 

For background, it develops and supplies antibodies that are then used in blood testing machines in laboratories and hospitals. These tests are employed in fields such as fertility, cancer and heart disease.

Although the company has been fairly quiet over the last few months, October’s results for the full year to the end of June were hugely encouraging. Revenue jumped 21% to £8.8m with pre-tax profits climbing 19% to £6.9m.

Those who like to see strong balance sheets may also like to know that Bioventix was debt-free and had £7m in cash when these numbers were announced.

While dividends aren’t of much interest to a lot of growth investors, it’s worth mentioning that the small-cap returned 61p per share to holders last year — a near 20% increase on 2016/17. There was also a special dividend of 55p per share.

Perhaps unsurprisingly, Bioventix’s share price has rocketed almost 75% over the last year. Had you bought the shares when the company first listed back in 2014, you’d have multiplied your money well over five times. 

The only negative with this — at least for prospective buyers — is that the stock now trades on a seriously expensive valuation of 32 times forecast earnings. 

Would I buy the shares now? Probably not. The general sell-off in equities towards the end of 2018 was a reminder of the dangers of paying too much for any company, regardless of its quality. With Brexit coming next month, the possibility of stock markets becoming choppy once again is real.

That said, if markets do dip, I’m certainly not ruling out buying a slice of Bioventix at a better price.

High confidence

Another company that’s been in fine form recently is D4t4 Solutions (LSE: D4T4). Ignore the questionable name for a second. Over the last year, the data solutions provider’s valuation has increased 55%.

November’s half-year results showed evidence of strong revenue growth. At just under £14m, this was almost 200% higher than over the same period in the previous year. The company also reported an adjusted pre-tax profit of £3.35m compared to a £380,000 loss in 2017.  

Commenting on the company’s outlook, CEO Peter Kear reflected that the business had “a strong pipeline of opportunities” and that D4t4 was looking forward to the rest of the year “with a high degree of confidence“. 

Interestingly, unlike Bioventix, the stock isn’t all that pricey for a business experiencing such growth — a little under 19 times earnings for the current year (ending 31 March).

Dividends are fairly negligible at this point (a yield of 1.2%) but these are rising fast.  The interim dividend was raised 12% to 0.7p per share. There’s also no debt and a solid cash position (just over £12m at the half-year point).

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Strong performance

Fast-forward four years to today and the valuation no longer looks modest. The current share price of around 3,000p puts the forward P/E ratio at 30 and the forward dividend yield at 2.4%. I think this outcome is a good example of how a valuation re-rating can really turbocharge investor returns when a good growth story becomes accepted by the investing community.

Of course, Bioventix has earned its re-rating. Over four years, revenue is up over 125%, earnings are more than 200% higher, and the normal dividend is almost 100% higher. Throughout the period, the firm’s quality indicators have been mind-bogglingly good, and the whole set-up screams ‘special’, so I can see why many investors have clung tightly to their shares. However, there’s no denying that the now-racy valuation raises the stakes.

Meanwhile, Bioventix keeps pumping out good figures. Today’s full-year results reveal revenue up almost 21% compared to the equivalent period last year, and pre-tax profit lifting 19%.

The firm’s debt-free balance sheet is a joy to behold and the cash pile rose by £0.8m to £7m. The money is more than the directors need to finance further growth, so they declared a special dividend of 55p per share, to be paid on top of a second interim dividend of 36p, itself up 16% on last year.

The company remains a quality outfit but forward earnings growth expectations are now the item that’s ‘modest”, cooling from the robust double-digit advances we’ve been seeing from the firm. If I still held shares in Bioventix I’d cash in my chips now to nail down my gains because I think the shares could drift lower as operational progress catches up with the valuation.

A decent long-term bet?

Instead of Bioventix, I’m tempted by FTSE 100 medical technology company Smith & Nephew (LSE: SN), which supplies joint replacements for knees, hips and shoulders; tools for minimally invasive surgery; advanced wound dressings; plus nuts, bolts, plates and other items for trauma surgery – all good stuff with apparent evergreen demand in today’s world.

The firm’s progress with revenue, profits and cash flow has been steady, albeit unspectacular, over the past few, which reflects in a keener valuation than we are seeing with Bioventix. At today’s share price close to 1,340p, the forward P/E ratio for 2019 sits at just over 17, and the forward dividend yield is a little over 2.1%. For that price, I see Smith & Nephew as equally exposed to the benefits of potential upside surprises as it is to downside risks, which is a fair proposition. I’d be happy to tuck some of the shares away for the long term.  

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Sheeple

Bioventix (LSE: BVXP) manufactures and supplies high affinity sheep monoclonal antibodies for use in diagnostic applications such as clinical blood testing. Founded in 2003, the Surrey-based biotechnology company has traded on AiM since 2014, and has a current market capitalisation of £125m.

Recent share price performance has been meaty, with the stock up 275% in the past three years. Last year it was booming thanks to continued demand for its monoclonal antibodies, favourable currency shifts and encouraging developments from project partner Siemens Healthcare Diagnostics on its new troponin antibody. Some reckon it could even be the UK’s most exciting investment opportunity.

Peak or plateau?

Bioventix posted more good news last month, raising annual pre-tax profits more than a third due to rising sales of its vitamin D antibody. Annual revenue rose 30% to £7.2m and its cash balance climbed from £5.3m to £6.1m. However, it also warned that the vitamin D market would plateau in the near future, and may only record a “modest further increase” in the coming fiscal period.

I have personally developed antibodies against soaring biotech companies because of the danger that you come to the party too late! My concerns are magnified by the fact that after three years of double-digit EPS growth around the 40% mark, City forecasters are pencilling in a drop of 18% in the year to 30 June 2018. A forward valuation of 26 times earnings is also a concern. After the peak, the plateau.

Mystic men

Pharmaceutical giant AstraZeneca (LSE: AZN) is a very different creature with a current market cap of nearly £66bn. It has also done well lately, its share price up 77% over five years, and almost 15% over three months. However, it has been a bumpy ride, with the stock plunging 15% in July after the failure of its Mystic drug, a first-line chemotherapy alternative.

I wrote at the time that this was a buying opportunity for the brave and it has since rallied strongly, so yay me. You need to understand the ongoing risks, though. Investors have had to be patient with the company, and put a lot of faith in CEO Pascal Soriot, who is developing the company’s long-term pipeline of treatments.

Future shock

On Wednesday we had the good news that the US Food and Drug Administration has granted accelerated approval to Calquence (acalabrutinib) for adult patients with mantle cell lymphoma (MCL), combined with disappointing results for new treatment tralokinumab aimed at patients with severe asthma. You can expect a lot more of this.

AstraZeneca’s EPS have fallen in four out of the past five years. Another 13% drop is forecast for this year, followed by a measly 1% rise in 2018. The prize, however, is further down the line, with Soriot projecting revenues of more than $45bn by 2023, now just six years away. That’s quite a leap from 2017’s projected $16.06bn. The forecast yield of 4.2% should help settle your nerves as you wait to see if his strategy is a winner.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today I’m looking at two contrasting small-cap stocks. One is a stock that I would steer well clear of, while the other appears to be a genuinely exciting investment opportunity, in my opinion.

Trending lower

Once a bulletin board favourite, Nanoco (LSE: NANO) has been a disappointment in recent years. The £60m market cap company manufactures quantum dots – miniscule fluorescent semiconductor nanoparticles that emit different colours, and are used in applications such as lighting, bio-imaging and solar energy. While the technology sounds interesting, Nanoco has failed to deliver for shareholders.

The company’s financials don’t make for great reading. For example, last year revenue fell to £0.47m from £2.03m the year before, and the group recorded a net loss of £10.6m. While revenue is expected to climb to £1.55m for the year ended 31 July, another hefty net loss of £9.8m is anticipated.

Furthermore, the group has struggled to generate adequate cash flow, and was forced to raise £8.6m last week at a significant discount to the share price at the time. That’s clearly a disappointment for existing investors, as the fundraising will dilute their shareholdings significantly. 

Nanoco’s share price has been locked in a downtrend for the past four years now, declining from around 180p to 26p today. With that in mind, I’ll be steering well clear of the company.

Surging higher

However, as a contrast, one small-cap company that looks very interesting, in my opinion, is £140m market cap Bioventix (LSE: BVXP). Trading at just under 1,400p at the start of the year, the shares now change hands for 2,900p, a year-to-date gain of over 100%. Furthermore, since moving to AIM in 2014, the stock has risen by an amazing 400%.

So what’s all the hype about and more importantly, can the momentum continue?

Bioventix specialises in the development and commercial supply of sheep antibodies for use in immunodiagnostics. Antibodies are proteins that are produced by the immune system to help stop viruses, infections, bacteria and disease harming the body, and Bioventix claim that its sheep-derived antibodies are more effective than traditional rodent-based varieties. The firm earns revenue by licensing its products to other companies that use them for clinical diagnostic applications such as blood testing.

A glance at Bioventix’s financials reveals a spectacular set of numbers. Over the last three years, revenue has risen from £2.7m to £5.5m, and earnings per share have surged from 30p to 68p, a compound annual growth rate (CAGR) of 31%. Equally impressive have been the company’s operating margins and return on equity, which last year, were 76% and 42% respectively. Dividend growth of 190% over the last three years has also been recorded. 

Interim results in March saw sales rise 32% to £3.1m, and profit before tax increase 49% to £2.5m. Then, in early September, the group upgraded its full-year profit guidance, stating: “Both revenues and profits before tax are expected to be ahead of market expectations for the year ended 30 June 2017.”

So it’s pretty clear, to my mind, that Bioventix has strong momentum at present. Is it too late to jump on board? On consensus FY2017 earnings estimates of 89.3p, it currently trades on a P/E ratio of 32.5. While that valuation is no doubt high, it doesn’t look entirely unreasonable in my view, given the company’s track record and growth prospects.

The post Why this small-cap stock could be the UK’s most exciting investment opportunity right now appeared first on The Twelfth Magpie.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

At today’s 165p, the share price of Ergomed (LSE: ERGO) has slipped almost 23% since the beginning of the year. But recent acquisitions and a strong pipeline of work look set to boost earnings per share during 2018 with City analysts projecting a rise of more than 150%.

The firm is making good strategic and operational progress that could propel the stock higher over time. Today’s interim results revealed revenue just over 30% higher than a year ago and a 42% lift in the gross profit figure.

Fast-growing services division.

The firm provides specialised services to the pharmaceutical industry and develops new drugs. The services division is growing fast and posted a 53% revenue increase during the first half of the year drawn from clinical research operations in over 40 countries. Meanwhile, the co-development division seeks partnerships with biotech and pharmaceutical companies where Ergomed delivers drug development services in exchange for carried interests in any revenues that the new drugs generate, which could come from sales and milestone payments.

The company signed service contracts worth £23m during the period and has a backlog of signed contracts pushing above £70m, which is almost 17% higher than a year ago. Meanwhile, several drugs in development could go on to generate decent income for the firm. Although for the time being more than 80% of the firm’s revenue appears to come from services rather than from carried interests.

Low debt

I like the firm’s low level of borrowings. The balance sheet in today’s report shows around £7k of debt being off-set by more than £2.4m in cash. But there was a cash outflow of a little over £1.3m in the period up from an outflow of £0.93m last year. Operating profit declined almost 9% due to a rise in administration, research and development costs.

I’m optimistic that the firm will soon find stronger feet when it comes to cash flow and profits and Chief Executive Dr Dan Weng is “confident that Ergomed is well positioned for further growth, both organic and through acquisition.” I reckon, with the forward price-to-earnings (P/E) ratio running a little over 13 for 2018, the firm is one to keep a close eye on.

Bioventix (LSE: BVXP) also updated the market with a trading update at the beginning of September. The firm specialises in the development and commercial supply of high-affinity monoclonal antibodies and earns its revenue by licensing the use of its creations to other firms that use them for clinical diagnostic work.

Low costs

Once again, the news from the company is good with revenues for the financial year to 30 June a little higher than £7m, which is more than 27% higher than the year before. The firm explains that because costs are only rising a little as revenues rise a lot, the directors expect revenues and profits for 2017 to be ahead of what the market was previously expecting — again!

Bioventix has been a dream investment for many over the past three years with the share price rising more than 320% due to ongoing operational progress and a valuation re-rating. Today’s 2,487p share price throws up a forward P/E rating of almost 29 for the year to June 2018, which looks full, but I reckon this stock has more to give.

The post These small-cap growth stocks could be millionaire-makers appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.