Ten small-cap value and growth ideas for 2023

Hello there! Paul suggested that I provide some ideas for 2023, so here we go! A selection of my favourite ideas from stocks that I've covered in the SCVR.

I have a tendency to stick to familiar sectors, which I find is an important way to build up familiarity with the themes and key issues affecting the stocks I cover. So it was not a surprise, when drawing up this list, that I found most of my favourite stocks were drawn from a few sectors.  I've therefore provided four "buckets" below:

• Drinks companies
• Investment banks
• Other financial stocks
• Other sectors

It's by no means an exhaustive list, but these are my favourite companies I've studied recently for the SCVR and should hopefully provide you with food for thought in 2023.

Please note that I'm also a big fan of two other sectors: pure-play fund managers and the franchised estate agents.

Fund managers I like include Jupiter Fund Management (LON:JUP) and Polar Capital Holdings (LON:POLR) and I've also been a big fan of Ashmore (LON:ASHM) over the years (that one is not a small-cap). The franchised estate agents include Property Franchise (LON:TPFG) and M Winkworth (LON:WINK) and Belvoir (LON:BLV) . None of these stocks are included below but you can take it as read that I also like those two sectors (and check the SCVR for previous comments on them).

In what follows, the italicised text has been added fresh, while the normal text is an excerpt from the most recent SCVR.

Cheers!

Graham

Drinks companies

A G Barr (LON:BAG) (5 Dec) (2 Aug) - high-quality drinks company that has passed on price increases to customers in 2022, has a cash-rich balance sheet, and was able to fund a £20m acquisition from its own resources in December. Historic numbers are terrific, including during the Covid era, making this a long-term compounder stock. Trades at an above-average earnings multiple that is in my view more than justified. Price/sales is about 2x which is not high in the context of the last 10 years.

Nichols (LON:NICL) (11 Jan) - another high-quality drinks company, the main brand asset at Nichols is Vimto. This stock has a family heritage that dates back over 100 years, and it’s a dividend hero that has made a payment to shareholders for every year that I can find records. It’s trading at a P/S ratio of about 2.5x which again is cheap in the context of how this stock has traded over the past 10 years, with no sustained share price progress since 2013. Covid had a huge impact on the “Out-of-Home” consumption of Nichols drinks and the company was loss-making in FY 2021 as it struggled with other related issues (e.g. logistics challenges in the form of failed shipment deliveries). But Out-of-Home consumption has now normalised and the company is due to announce the results of a Strategic Review in March; it already announced that it has identified “significant opportunities for net margin improvement”. It expects to act on this review in the current year, with the benefits seen from 2024. I’m excited by the story here because if net profit margins can normalise, net income will surge to fresh all-time highs and the shares will prove to be a bargain at current levels. Over to management to see what they can do now.

Investment banks

Peel Hunt (LON:PEEL) (1 Dec) - H1 results are poor, as expected, but the company does succeed in achieving a breakeven result despite “multi-decade lows” in equity capital markets activity. The investment banking division saw a collapse in activity with only a handful of IPOs taking place in the UK market and with other fundraising deals only a fraction of what they were last year. The other revenue streams at Peel Hunt were more stable and thanks to a chunky reduction in pay/bonuses, this H1 result looks ok to me. I now think this share could be approaching value territory thanks to the strong balance sheet which includes £41m of cash and a very strong net current assets position. (updated note: the latest market cap is £115m, best value is below book value c. £90m).

Numis (LON:NUM) (8 Dec) - this investment bank posts weak full-year numbers, as expected. The expectations from the summer weren’t met, as H2 saw weakness spread from the public markets over to the private markets. The share price is down by 30% since I covered it last and is now hovering around the value of the company’s balance sheet net assets. This company has a great track record of share buybacks and dividends and I expect that profits are going to recover nicely, although the timing is beyond their control.

finnCap (LON:FCAP) (13 Dec) - another investment bank idea, this small boutique unfortunately failed to achieve breakeven in the most recent H1 period but losses were at least limited to a couple of million pounds, during a period in which there was very little activity for the company to benefit from. Headcount was reduced and the dividend was cancelled. This is still considered the #1 broker on AIM and I would expect it to make hay when the sun shines again. In the boom times (FY March 2021 and FY March 2022), it was able to earn annual EPS of about 4p (the current share price is 13p). The September 2022 balance sheet had tangible equity of £17m (latest market cap: £23m).

Other Financial Stocks

Mercia Asset Management (LON:MERC) (6 Dec) - This asset management company has a growing fund management business while also being an investor of its own capital. At its most recent interim results, it reported tangible net assets of £175m (higher than the current market cap), and also had £770m of 3rd-party AuM. Additionally it bought a lender to SMEs with a capacity of around £400m. I think there is a lot of business on offer at the current market cap (around £150m). The 3rd-party fund management business offers an interesting growth opportunity.

My comment on the publication of the H1 results:

The extraordinary gains of H1 last year have not been repeated, however the underlying operating profit measure is up by 6% and the investment portfolio generally appears to be doing well. I continue to find it strange that this stock trades so cheaply considering its fortress-like balance sheet, including a huge cash position, and its good track record. A small acquisition announced today also sounds like good news, bolstering its capabilities.

S&U (LON:SUS) (8 Dec) - I’ve written about this one extensively. It’s another family-controlled business with motor lending and property bridging divisions. It currently trades at a modest premium to book value which I consider to be good value, since S&U has a very long history of fine returns for shareholders. Of course the current economic environment is going to scare some investors away from investing in this type of business at this time, but I consider that the incentives of management here are aligned with other shareholders and their underwriting is likely to be prudent. I could be wrong, of course!

My comment on their December update:

The December trading statement from this family-owned lending group confirms that their receivables book continues to grow rapidly. Even more importantly, collections remain strong in the motor finance division and the level of defaults in the property bridging division is considered to be low (only 7 technically defaulted accounts). I can understand that investors will be very cautious towards this type of stock in a recession that includes both a cost-of-living crisis and falling property prices. But I believe that the Coombs family shares this cautious attitude, and have excellent alignment with other shareholders.

Other sectors

Mortgage Advice Bureau (Holdings) (LON:MAB1) (1 Dec) - This one issued a profit warning in December due to the widely-discussed mortgage market problems. My comment at the time:

 With the help of a franchise business model, it has earned excellent profits and returns in recent years. However, it is going to “slightly” miss its 2022 forecasts, and we now can’t expect it to make any progress in 2023, due to its having fewer mortgage advisers on its books and lenders imposing stricter criteria on new loans. Mortgage volumes have collapsed and MAB is hoping that this will recover by H2 of next year. I’m not sure when the recovery might happen but my perception is that this stock has some high-quality characteristics and could be a nice candidate for a recovery rally if and when normality resumes.

MS International (LON:MSI) (7 Dec) - excellent H1 results from this very quiet, family-controlled group of businesses. Even after nearly 30 years of consecutive dividends to its shareholders, MSI’s cash balance (£24m) remains formidable as a percentage of its market cap. Today’s strong results (PBT of £3.5m) were achieved without any contribution from the company’s Defence division, which will hopefully be able to make meaningful profits in the years ahead with the help of a large US Navy contract. I love finding quirky businesses like this which quietly do a good job for their shareholders. MSI gets the thumbs up from me. (this stock is considered a value trap with excessive board pay by Mark Simpson - here).

Trustpilot (LON:TRST) (12 Jan) - I’ve written about this one several times, and it has pleasantly surprised us with some profit upgrades due to its flexible cost base. I believe that this one has multi-bagger potential but the path it might take there won’t be straightforward. It has yet to post any statutory profits but what it does have is a cash pile worth $73.5m, recurring subscription revenues of $162m from business customers with a very high retention rate, and what I consider to be a unique competitive position. You have almost certainly heard of Trustpilot, but have you heard of any of its competitors? Maybe not! So I think there is an investment thesis here which says that the company is building a quasi-monopolistic position. In the end, maybe it gets taken out by a larger tech company? The price to sales multiple has risen from 2x to 3x since I started covering it, so it’s not the bargain that it was, but I think the long-term potential is still there.