Even on today’s 7% rise on the release of the full-year results, the market capitalisation is only around £54m, although this means it’s just crossed the threshold of £50m that would put the share on many more investors’ radars.

But smaller firms are known for their volatile share prices, and we often see sharp movements in both directions. Nevertheless, I’m comfortable with holding shares with smaller market capitalisations as long as I choose carefully, diversify, and weight my holdings sensibly.

Growing well

The key attractions for me are a modest valuation, decent operational momentum, and a reasonable showing on quality indicators. There’s also a dividend yield running close to 3% with the payment having grown by 110% over the past five years.

The firm makes its living in marketing communications and advertising with strong input from technology. In other words, Mission Marketing is plugged into the digital world. The company website explains that 16 marketing agencies make up the business operating in the UK, Asia and the US, and the directors let each of the agencies “think for themselves.” Such an approach reminds me of well-known investor and company boss Warren Buffett’s philosophy, which is no bad thing because Buffett’s Berkshire Hathaway has been phenomenally successful over the years.

During 2018, the figures for trading from continuing operations show that revenue rose 13%, adjusted earnings per share shot up 24% and borrowings plunged 44% to £4m. This outcome represents some eight consecutive years of growth from the company, and the directors stamped their seal of approval by pushing up the total dividend for the year by a chunky 24%. To me, that indicates that they have confidence in the outlook. Indeed, 2019 is off to a good start, and chairman David Morgan said in the report he has the “confidence to believe that 2019 will see this momentum continue.”

Big-name clients

In 2018, the company attracted some well-known names as clients such as Amazon, HP, Petro-Canada Lubricants, Lindt, Muller, Diomed, Barclays and Aviva. However, I’m mindful that there is likely to be a high degree of cyclicality in the company’s operations. We could see a downturn in business at some point if the wider macroeconomic environment deteriorates. I think that’s one reason for the low valuation the stock market has assigned to the company.

However, Mission marketing is growing now and expects a mid-single-digit percentage advance in earnings this year. I’m tempted to pick up a few of the shares as part of my diversified portfolio to see what happens from where we are now. But another approach to participating in the potential of smaller companies would be to buy into a tracker fund that follows small-caps. Whether you go for an individual share like Mission Marketing or a fund, be sure to do your own research first.

The post I think this small-cap share has the potential to outperform the market appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any 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.

Unlike other companies that usually fall into this valuation, Mission isn’t struggling to grow either. Over the past six years, earnings per share have grown at a steady rate of 5% per annum and net profit has increased at a rate of 7.5%. 

And today, the company announced that it expects to report further growth for 2017. Management expects revenue to be “6% ahead of last year, reflecting like-for-like growth of almost 4%.” Meanwhile, headline profit before tax “is expected to be 10% higher, at £7.7m, representing the seventh consecutive year of growth.“

Avoiding the business

Despite Mission’s low valuation and steady growth, there are some issues with the business. For a start, the balance sheet is weak. Intangible assets accounted for around two-thirds of the £134m in total assets booked on the balance sheet at the end of the first half. Excluding these intangibles, total shareholder equity is negative £7m. The group also has a reputation for being heavily leveraged. Net debt was £9.4m at the half-year compared to net fixed assets of £3.8m. What’s more, cash flows tend to be weighted to the second half of the year, which means that there’s a lot of uncertainty surrounding the company. 

Still, management is trying to change investors’ perception of the business. Today’s update notes that thanks to an “exceptional year for working capital reductions,” net debt ended the year at £7.5m, reducing the net debt-to-EBITDA ratio below one “thereby triggering a 0.5% reduction in interest rates on the group’s debt facilities.” Moreover, the management announced last year that it was planning to improve its operating margins from 11.5% to 14% by March 2020, which should unlock additional cash to improve the balance sheet. 

So overall, Mission is heading in the right direction, and as the valuation already reflects the worst-case scenario, I believe that there could be considerable upside for the shares if management manages to change investor perceptions. 

As well as Mission, airline Flybe (LSE: FLYB) is another value stock I believe you should consider in 2018. 

Long-awaited turnaround 

Over the past few years, it has been undergoing a transformation plan. The previous management had presided over a sad period for the group as over-expansion inflicted heavy losses. Flybe’s new chapter revolves around being the best it can be by providing services only on the routes where there is suitable demand.

The good news is that on more than two-thirds of the company’s routes, it has no competition, so unlike other carries, it does not have to worry about price wars. These domestic routes are seeing rising demand as train fares increase, and it becomes cheaper and faster to fly across the country rather than go by rail. 

Unfortunately, it has been a consistent under-performer in recent years. The firm’s recovery was supposed to get under way this year, but an IT upgrade has resulted in further delays. 

Still, when the airline finally takes off, the gains could be huge. Thanks to the market’s downbeat view, the shares are trading at a price-to-book ratio of only 0.5. 

The post Should I bet on these 2 value stocks for 2018? appeared first on The Twelfth Magpie.

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• 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 shares in Mission Marketing Group and Flybe Group. 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.

That being said, value investing isn’t easy, you have to be prepared to buy stocks that have fallen out of favour with the market and have an iron conviction that your analysis is correct, which isn’t easy. But the results speak for themselves.

Building up cash 

One potential value investment is the Mission Marketing Group (LSE: TMMG). Mission is a marketing services company, but unlike many of the firm’s peers, the shares trade at a mid-single-digit earnings multiple of 5.5. Most other marketing services companies trade at a forward P/E in the low teens so straightaway it’s clear there’s value on offer here.

Over the past five years, management has nearly doubled pre-tax profit and earnings per share have risen from 4.9p in 2012 to 7.3p as predicted for this year. Next year analysts have pencilled in further earnings per share growth of 15% implying a 2018 P/E of 4.8. As well as the attractive valuation, shares in Mission support a dividend yield of 4.1%.

Management has hiked the per-share dividend payout by 65% during the past four years. The one downside about the business is Mission’s relatively weak balance sheet. At the end of 2016, the company reported net assets of £77m and intangible assets of £83m. Still, management knows how important cash generation is and has been concentrating on improving cash generation.  The firm reported a free cash flow of £5.3m for 2016, around 90% of profit before tax. During the year the company paid down £3m of debt, so it’s clear progress is being made with regard to the strength of the balance sheet.

Income champion? 

Shares in Connect Group (LSE: CNCT) also looked to be fundamentally undervalued. At the time of writing shares in the distribution company trade at a forward P/E of 6.8 and even though earnings per share are set to decline by 16% this year, this outrageously low multiple seems unwarranted. 

Shares in Connect have traded at a low valuation for much of the past four years but today’s valuation looks weak even by historical standards. For the previous four years, shares in Connect have traded at an average P/E of eight, implying a share price of 132.8, 33% above current levels. On top of the low valuation, the shares also support a dividend yield of 8.7%. The payout is covered 1.6 times by earnings per share. 

The recent sale of Connect’s Education & Care division for £64.4m will strengthen the company’s overall balance sheet and provide extra firepower for the business to reinvest in expansion, increase dividends to shareholders or pay down debt. At the end of February 2017, the company had net debt of £150m.

The post 2 deep value stocks I’d buy today 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 shares in Misson Marketing Group. 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.