Not so toxic

I’d bet that most retail investors won’t have heard of £200m cap Augean (LSE: AUG). The AIM-listed, Wetherby-based business specialises in hazardous waste management — hardly the sexiest of line of work and unlikely to hit the radars of those searching for the next big tech play. When it comes to making money in the markets, however, what’s ugly/boring can often be very lucrative (see self-storage firms and pest control businesses).  

Back in October, the company announced that strong trading over the third quarter would likely see adjusted pre-tax profit for 2019 come in “materially ahead” of previous market expectations of £16.5m. Today, it followed this up by stating that this encouraging performance had continued over Q4 and that the number would now be “at least in line” with analysts’ new predictions of £18.4m. 

Of course, all this good news hasn’t gone unnoticed by the market. Augean’s shares were already up a little over 50% since October before this morning, highlighting just how lucrative small-cap investing can be even over the short term. 

Although one might argue that the ‘easy money’ has already been made, I suspect there could be more gains to come for those willing to hold for the medium-to-long term, especially as the company still trades on a very reasonable 12 times expected FY20 earnings and has a market capitalisation of just £84m.

The only negative in all this is that Augean won’t appeal to those looking for income alongside growth as the company doesn’t currently pay out any of its earnings as dividends. 

Record profits

Another market minnow that’s hit my radar recently is 100 year-old elevator parts supplier Dewhurst (LSE: DWHT). 

December’s results for the full-year to the end of September were certainly very positive with the company reporting record sales of £56.4m — up 23.4% from the previous financial year. Adjusted operating profit also broke records, coming in at £7.7m — up 28.3%.

Like most companies, Dewhurst’s management likely cheered the outcome of the General Election since it provides a bit more certainty on trading going forward. That’s not to say that the company is wholly dependent on the UK as it also has a presence in the US (a market it describes as “strong“), Australia (described as “steady“), plus Canada.

Like Augean, Dewhurst’s shares aren’t exactly pricey at the moment, despite making great gains over the last year (+54%). A forecast price-to-earnings ratio of 12 for FY20 looks good value, particularly given the defensive line of work the company operates in (I’m pretty sure a quicker method of moving between floors in a building is yet to be discovered!) and the fact that Dewhurst has no debt on its books.

There’s even a dividend. The anticipated 13.5p per share payout in the current financial year equates to a yield of 1.7%, hardly massive but still worth having. Holding Dewhurst’s stock within an ISA also means that holders won’t be taxed on this income either.

The post 2 secret small-cap stocks I think could be perfect ISA additions appeared first on The Twelfth Magpie.

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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.

However by 2013, competitors had started to cotton on to Dialight’s success. Increased competition, coupled with Dialight’s own failures, resulted in a tidal wave of problems for the group. Profits slumped from a high of £14m in 2012 to a lowly loss of £2.8m by 2016, even as revenues continued to expand, hitting a high of £182m for 2016.

And to me, it looks as if these issues are going to continue into 2018. 

Uncertain year

Even though management issued an upbeat forecast for 2018 alongside the 2017 numbers, reading between the lines, it seems as if a cloud of uncertainty is going to continue to hang over Dialight throughout the year. 

Specifically, CEO Marty Rapp said: “We are taking corrective action and in the near term are wholly focused on the manufacturing challenges which will continue to impact our results in H1.” He then went on to say that “results for 2018 will be heavily weighted to H2.“

So until the company can prove that it’s back on track in the second half, I believe the market will continue to view the business with a degree of scepticism, especially considering it’s been struggling to turn itself around since 2012.

Moreover, even if management does manage to right the ship, the stock’s valuation of 15.5 times forward earnings is too costly in my view for a turnaround situation.

Keeping it in the family 

Considering the above, I would dump Dialight in favour of sector peer Dewhurst (LSE: DWHT).

As Dialight has struggled, Dewhurst has pushed ahead over the past five years. For the year to the end of September, the company reported sales growth of 12.2% and profit before tax of £6m, up 17.3% year-on-year.

As well as this growth, there are two other key reasons why I like Dewhurst as an alternative to Dialight. 

Firstly, nearly 50% of the company’s shares are still owned by the Dewhurst family, which means that management is more likely to act in the best interests of shareholders… because they are the shareholders.

Secondly, the company has a more unique product offering than Dialight. Rather than mass producing LEDs, Dewhurst designs and manufactures critical products for equipment such as lifts and so-called ‘street furniture’ such as traffic management bollards. These products are not interesting but they are specialist, and Dewhurst’s strong relationship with its existing customers should help it maintain a leading position in the market.

Unfortunately, the one downside to this stock is its price. Shares in the company currently trade at a forward P/E of 22 and support a dividend yield of 1.1%. With earnings per share set to grow by just 1% for 2018, it’s difficult to justify the premium valuation.

That said, after stripping out cash balance worth 213p per share, the shares trade at a more modest multiple of 17.6 times forward earnings which, in my view, is a much more appealing valuation.

The post Why I’d dump this struggling turnaround stock in favour of this growth monster appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share 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.

Bright future

The recent update from electrical component and control equipment manufacturer, Dewhurst (LSE: DWHT), showed that it is making encouraging progress. In the first half of the year it recorded sales growth of 22%, with pre-tax profit up 76%. Its performance was aided by a weaker pound, with revenue of £26.1m receiving an uplift of around 10% due to currency fluctuations. However, the company also achieved growth in local sales values at all of its companies, with its North American operations being the only area where revenue declined.

The company’s outlook outside of the UK remains positive according to its recent update. While the UK may be experiencing a slowdown after the general election and as Brexit talks commence, demand in Australia and parts of North America continues to be robust. This is set to contribute to a rise in earnings of 19% in the current financial year. Since Dewhurst trades on a price-to-earnings (P/E) ratio of 16.7, this equates to a price-to-earnings growth (PEG) ratio of only 0.9. This suggests that it offers a wide margin of safety and could be worth a closer look.

In addition, dividends per share are set to be covered 4.1 times by profit in the current year. This suggests that the company’s dividend yield of 1.7% could increase over the long run and add to its attraction as an investment.

Cheap price

While Dewhurst may have a wide margin of safety, it is not the only stock to do so. Supplier of power cords and cable assembly solutions, Volex (LSE: VLX) trades on a P/E ratio of just 10.2 at the present time. This suggests its share price could continue to rise even after its 86% gain during the course of the last year.

One reason for the company having a low rating could be its volatile bottom line. Over the past five years it has been lossmaking in three of them, while sharp improvements in profitability have generally followed. Investors may therefore be including a discount to the company’s valuation in order to protect against further volatility. However, next year profit is expected to rise by 11%, which puts the company’s shares on a PEG ratio of only 0.7. This suggests they offer growth at a reasonable price.

While Volex does not currently pay a dividend, its low valuation could make it a relatively attractive stock at the present time. Many stocks are trading at or near record highs at present, which could make cheap stocks even more in demand among investors.

The post These small-cap stocks are trading at large discounts appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens 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.