Ten Small-Cap Value and Growth Ideas for 2024
Hello! Graham here with part 2 of my annual round-up.
In this article, I’m going to compile my ten favourite ideas for 2024.
Previous articles in this series:
As always, none of this can be construed as advice. I’m describing the stocks I find most interesting, but it’s important for you to do your own research and to manage your investments in a way that is suitable for your own individual circumstances.
This article is not going to contain very much analysis of individual companies. Instead, it will describe for you my decision-making process as I decide which stocks to include in my 2024 list.
Walking you through my process
Narrowing down the list of all stocks I am bullish on is a very difficult task.
From last year’s list, I have a positive view on eight of the ten stocks. I have temporarily turned neutral on one of them (S&U (LON:SUS)) and another has been delisted (Numis (LON:NUM)).
The remaining eight ideas from last year’s list are:
A G Barr (LON:BAG)
Cavendish Financial (LON:CAV) (formerly finnCap (LON:FCAP))
Nichols (LON:NICL)
MS International (LON:MSI)
Mercia Asset Management (LON:MERC)
Mortgage Advice Bureau (Holdings) (LON:MAB1)
Peel Hunt (LON:PEEL)
Trustpilot (LON:TRST)
So if I leave all of these on the list, I only have two spaces for new entrants.
And my bias is very much to leave all of these on the list, if I can. I have kept up to date with them throughout the year and I am happy with how all of them are performing. Please see the 2023 review for more information on their individual performances.
But there are so many more stocks I could add to this list for 2024. Checking the SCVR archives over the past couple of months, there are at least 25 stocks I could add - one of the consequences of depressed markets being that many companies I like appear to offer good value.
But then I doubt that anybody wants to read an article with the headline “33 ideas for 2024”!
Ruthlessly narrowing it down
Here are the 25 stocks I'm considering:
Anglo-Eastern Plantations (LON:AEP)
CMC Markets (LON:CMCX)
Duke Royalty (LON:DUKE)
Empiric Student Property (LON:ESP)
Volution (LON:FAN)
Frontier Developments (LON:FDEV)
IG Design (LON:IGR)
Impax Asset Management (LON:IPX)
Jarvis Securities (LON:JIM)
Liontrust Asset Management (LON:LIO)
ME International (LON:MEGP)
Mulberry (LON:MUL)
Northern Bear (LON:NTBR)
PayPoint (LON:PAY)
Polar Capital Holdings (LON:POLR)
Reach (LON:RCH)
Solid State (LON:SOLI)
Secure Trust Bank (LON:STB)
Springfield Properties (LON:SPR)
SThree (LON:STEM)
Supreme (LON:SUP)
TI Fluid Systems (LON:TIFS)
TT electronics (LON:TTG)
Ultimate Products (LON:ULTP)
XPS Pensions (LON:XPS)
Since I want to whittle down my list very significantly, I’m going to have to be ruthless. I’ll start by eliminating the companies with the smallest market caps - less than £100m.
Sticking to companies over £100m should help to broaden the appeal of this list, while also reducing "risk" (in theory, but perhaps not in reality!)
MUL
FDEV
JIM
NTBR
Each of these companies has their own particular issues that might have dissuaded me from including them in the top 10 list anyway, so I am comfortable with this decision.
The next thing I’m going to do is eliminate stocks with too much foreign risk from consideration - again partly to broaden the list's appeal, but also to get rid of some economic/political risks that are entirely beyond my comprehension. This eliminates one stock:
AEP
Next, I’ll take a leaf out of Ed’s book and make sure that my remaining candidates are well-diversified by sector.
It turns out that I have three fund managers in my remaining candidate list: LIO, POLR and IPX.
My favourite one of these is Polar: Liontrust is less specialised than the other two, and I perceive that Polar’s primary specialisms in technology and healthcare are a lower-risk bet in terms of longevity than Impax’s heavy focus on ESG.
This eliminates:
LIO
IPX
But we still have eighteen candidates left!
To reflect that I am looking for very good value, let’s eliminate those with the highest P/E multiples. These are:
ESP
FAN
SOLI
It is tempting to keep ESP but I have another property company in the list (SPR) and so eliminating ESP is consistent with the goal to diversify by sector.
To reflect my aspiration that this list should include a growth element, let’s also exclude two candidates who have struggled to grow their top lines - not just in the last year or two but over several years. These are:
TIFS
RCH
A newspaper group (Reach) struggling to grow revenues is hardly a surprise!
Similarly, let’s exclude two financial stocks that may offer excellent value but where organic growth may be limited and/or where the risk levels might be rather high for a 10-stock list:
DUKE
STB
Only eleven candidates left!
Next, let’s get rid of companies carrying a large amount of debt relative to their market cap. In a concentrated 10-stock portfolio, I am willing to give up some return potential to improve the financial health of my choices. This means losing two stocks:
SPR
TTG
I am not happy to lose my last housebuilder, but I'll do it.
I am also very sad to see TTG go, but something has to give and financial risk is as good a reason as any. I don’t intend to issue an update six months from now, taking companies off the list because their debt burden is an issue!
Next, I'll eliminate nicotine-related risk with SUP. I will also eliminate XPS as it is not one I have studied in as much detail as the others, and it is also more expensive by P/E multiple than nearly all of the remaining candidates.
We are now down to just seven.
CMCX
IGR
MEGP
PAY
POLR
STEM
ULTP
CMCX: I am a long-term holder of IG group (LON:IGG) and feel that I have a great deal of familiarity with this sector. I have also previously dabbled in CMCX shares, but never expected that they would fall back to this level of cheapness. See my SCVR coverage on November 16th.
So now the question is whether any of the remaining candidates should join the list:
IGR
MEGP
PAY
STEM
ULTP
I like all of these companies for different reasons.
But do I like any of them more than I like the companies already on the list?
Yes, I am fairly certain that I like PAY more than I like MSI.
I most recently covered Paypoint on 23rd November, ambitiously describing it as an under-appreciated and under-rated “fintech” stock.
Here are some extracts from PayPoint’s StockReport.
StockRank:
Value/yield:
Quality:
And it passes my favourite screen:
Therefore, even if I hadn’t studied PayPoint’s fundamentals for many years, the numbers alone would greatly intrigue me.
MSI International also has interesting numbers and a great story, but I am less comfortable with my ability to understand the company’s operations and its contracts (it is a contract-driven engineering stock).
This underlines an important note: I am explicitly not trying to come up with the objectively best list of ideas. I have to take into account that there are some stocks I understand better than others, and that it’s safer for me to stick with these ones. I understand PayPoint better than I understand MS International. Other investors and analysts will understand MSI better than they understand PAY.
As for MEGP, ULTP, STEM and IGR, they have all nearly made my 2024 list. If I was coming up with a brand new list today, there is a good chance that some of them would be included. Especially considering that existing list members such as MAB1 and TRST have seen great returns over the past year, and in my opinion do not offer the same generous value that they did a year ago.
But I don’t believe in chopping and changing a portfolio, even if it is merely a portfolio of “ideas”! So I’ll leave MAB1 and TRST on the 2024 list.
This means that my list for 2024 is, in alphabetical order:
BAG
CAV (formerly finnCap (LON:FCAP))
CMCX
MAB1
MERC
NICL
PEEL
PAY
POLR
TRST
Average market cap: c.£350m (largest: TRST, £583m. Smallest: CAV, £43m.)
Average P/E multiple is not meaningful as three of them have been loss-making and others have highly volatile earnings.
The performance of my 2023 list was freakishly good. I would be satisfied if the 2024 list at least matched the return of the FTSE All-Share Index this year, but that will depend on a great deal of luck and events that are entirely beyond my control (such as the timing of takeovers). Let’s see!
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36 comments
Hi Graham - I have been looking at Trustpilot (LON:TRST) today. For background I until very recently used to work for a company which was a competitor of sorts albeit a competitor providing 'expert' rather than user-led reviews. (I won't say which company as I like to maintain a degree of anonymity).
Several times across past Stockopedia articles you've said it doesn't have much competition. I agree that's mostly true of the UK - I think it has some sector-specific user generated review competition e.g. Checkatrade. But how confident are you that that is true of other countries as well? I am familiar with the UK review market but I have little clue about the US or Europe for example.
I've noticed you've had no user comments on Trustpilot so hopefully I can join in from now on so you feel a little less lonely in your commentary!
Hi Tortoise, thanks for the comment. Have you heard of Bazaarvoice? https://www.bazaarvoice.com/
They have been mentioned to me as providing competition. Although I'm not really convinced that they do, in the sense that nobody looks for a Bazaarvoice rating before buying a product!
G
Trustpilot (LON:TRST)
Hi Tortoise Investor (and Graham)
Thanks for your comments here.
I've too wondered about the non-UK competitors (Feefo, sitejabber, etc..?), but irrespective of what I think, the non-UK revenues seem to be doing okay based on the last published figures.
Note the 19.1% bookings growth within Rest of World (ROW), which has now become the largest segment.
There's lots to like with Trustpilot, especially if operating leverage kicks in soon.
However, I hope it's okay to add one main bear point, which is the decreasing growth in paying customers.
This is the main thing that has kept me from investing so far.
It's also worth pointing out that the number of reviews sent out by active customers* looked quite low in FY23-H1 vs the previous 12 months, although perhaps this shouldn't be surprising given the macro environment.
(*my calcs here are estimates based on actual figures published by the company)
---
It will be interesting to see whether the number of paying customer numbers starts to rise when the next results are released.
Good spot re only 4% increase in paying customers - that should be an upfront KPI not put on page 4 of the half year results. So presumably that means most of the revenue increase in the last half year is accounted by fee increases or existing paying customers paying for more expensive subscriptions?
Trustpilot (LON:TRST)
"So presumably that means most of the revenue increase in the last half year is accounted by fee increases or existing paying customers paying for more expensive subscriptions?"
It looks like it, doesn't it?
EXISTING FEE-PAYING CUSTOMERS
I personally think Trustpilot is an excellent business, but not a monopoly.
And whilst price rises will work for existing customers who won't want to lose their review history, it might not work so well when attracting new customers who have other options out there.
On this latter point, the below might be of interest (although it's biased):
https://www.linkedin.com/posts...
FREE CUSTOMER GROWTH RATES
I'm not sure the above would be a big issue if the number of free customers was increasing, as presumably these customers won't look at the pricing until they need to, by which time it's too late for them to escape the Trustpilot ecosystem.
But the Year-On-Year growth rates for Free Customers has fallen from +67% in 2019 to +16% in 2023-H1, a consistently decreasing growth rate since peaking at +72% in 2020.
This lowers the potential number of customers upgrading to fee-paying accounts in the future.
---
For me the business case at the current Market Cap ($900m) only works if operating leverage kicks in rapidly, which I'm not entirely convinced of right now based on the above.
Before I retired, I was a director at a large motor dealer group. About 8 years ago, I added Trustpilot as part of our marketing programme. It was a bit of a no brainer. TP were the market leader, low cost and we could harness our already great customer scores ( we were used winning numerous awards from manufacturers, Motability etc.)
The mechanics of the TP system are simple. Each month you send them a download of all the customers email addresses for the ones that bought a car. The vast majority of customers are delighted with their shiny new (and/or in our case used) car and its easy to get lots of good reviews.
If a customer is not happy about their purchase, you generally know about it within a couple of weeks. Therefore, unscrupulous companies can easily not forward TP their email addresses.
Obviously, TP allow customers to write a review directly, but its a numbers game - few do in comparison to the customers who have been prompted for a review by TP shortly after their purchase.
Contrast that to companies who are on TP but not TP customers themselves - their reviews numbers are not massaged in any way and are often brutally low. It was easy for our sales people to use these TP scores to win over sales.
Since then, TP have really blown away the competition, and it must be very difficult to not be on it if you want to protect both your company's reputation and sales.
Bought PayPoint (LON:PAY) some time ago on the basis a chap like Woodford must know what he was doing. Would be good to see it advance.
I see all the 5 year CAGR figures for PayPoint (LON:PAY) are red. I can’t believe something with non-existent growth would be regarded as a fintech stock. Is the UK market that moribund?
'Morning Don, what's your verdict on its free cash flow? I hold some PayPoint (LON:PAY) .
PayPoint (LON:PAY)
The whole business was forced into a reset when the pandemic accelerated the switch from cash to digital payments. As a consequence, it has introduced a significant number of new revenue lines which account for the more recent growth from the trough of 2020. It would not be unfair to describe the sheer number of new initiatives as having the appearance of some desperation. But some of the new revenue streams, for example, the acquisition of Appreciate, do have some potentially good prospects. So the thesis is not based on its historical growth performance, but rather on its future growth prospects. And the chart tells its own story: even a recovery to halfway back to the levels of 2018 would represent a good profit for buyers today.
PayPoint (LON:PAY) Yes historic performance poor, but the bull case is the new growth initiatives (digital payments, parcels, gift vouchers, etc) should start to come through and offset the decline in the legacy business. I had a closer look at this today, but can't say I'm fully convinced yet and suspect overall growth will remain sluggish. No doubt it's cheap, so will put on the watchlist and may buy some if it dips.
Woodford?! [deranged emoji]--argh!
What a great article! Many thanks Graham, I love the description of the process.
A belated "You're Welcome!". Cheers Pete.
appreciate sharing your thoughts, I find really difficult to make final choices, there are so many interesting companies with good track records to choose from!
Pleased to say I own three of these! Polar Capital Holdings (LON:POLR) PayPoint (LON:PAY) Cavendish Financial (LON:CAV)
Given you looked at fund managers I am surprised you didn't weigh up Jupiter Fund Management (LON:JUP) as a possibility. I'd have thought that's an interesting one on basis of:
(I hold on basis of above)
Just as well you didn't listen to me! (Anyone looking at Jupiter Fund Management (LON:JUP) should read the RNS 9/1)
Yes, dodged a bullet by leaving that one out! G
Hi TI,
For the untrained eye, what is the significance of the RNS 9/1?
Having followed the process of elimination to its very end Graham I was pleased to see that I hold 5 stocks out of the final 10 for your 2024 List. Mind you, at the start I had only 6, out of the considerable number in my portfolios. Yesterday was spent in creating an xlsx file of 9 spreadsheets to guide my thought processes through the year ahead and just to remind me it's titled Sell High Buy Low 2024. Happy New Year and thanks for your ideas.
Graham it would be hard to ignore an investor who has just returned 25% for the year. I hold MSI being perhaps more willing to take the vagaries of contract driven business than you. Actually my driving force is defence at present so it makes sense. But I do like the Paypoint idea which you raise here so I will do a little DYOR and may add to my portfolio. Thankyou for that. Happy New Year and I hope it is a good one for you.
Cheers Camtab, HNY to you too! Best of luck. G
Thanks Graham for a really interesting read.
Certainly some overlap with my own portfolio and now some ideas for me to further investigate. Your process is I think very pragmatic and at the base stage mirrors what I do myself as I certainly don’t want to dump existing good runners so number of potential newcomers is restricted. However your approach to sector specialists gives me pause for thought as on reflection I am too overweight in fund managers and financials and possibly guilty of having fallen in love with a couple of holdings.
Thanks again.
Thanks Cricketfan, appreciate the comment. I would have loved to include more fund managers in the list but wanted some degree of diversification in a short list. Best of luck with your selection. G
A very interesting read and I will certainly look into more detail on a couple of these that I've not really studies before, such as PayPoint (LON:PAY) and £IGR
I'm still not sure about CMC Markets (LON:CMCX) to be honest - obviously very cheap (at least on a book value basis) but they do have a nasty habit of delivering nasty surprises and profit warnings out of the blue, while trading seems to have been particularly poor recently (much worse than many of its peers which makes me wonder if there are some underlying issues, rather than this just being a soft market).
CMC Markets (LON:CMCX)
while trading seems to have been particularly poor recently (much worse than many of its peers which makes me wonder if there are some underlying issues, rather than this just being a soft market).
Ultimately that is the question - i dont think we have enough info to know what future holds. I would presume regulations are tougher than ever so i wouldnt presume a return to the good old days is a given. I have had a punt here on the basis that its is trading not far from book value (i invested at below 100p) so as long as their is no nuclear nasties they do have time to show some bounce back ability as they have done in the past - if they doa get a decent purple patch that isnt totally a one off price should bounce back. could easy se a scenario where the easy profits are no more and they tick along make enough to subsist. The reality here is that there is unlikely to be decent visibility based on what the company themselves are saying with regard to this year and next - £20 mill profit is 15 * earnings which aint really going to encourage many to buy.
CMC interface is dire and they offer fewer indices and shares than IG Index. Not sure why they cant fix this, but this is why they are tading poorly.
Graham, an interesting selection but 2 soft drinks companies and 7 "financials" and 1 in the technology sector, does not seem very diversified to me.
I also wondered this. The sector classifications are not that helpful though, are they?
For example I recently bought into Nexteq (LON:NXQ) and was surprised to see this classed under "Financials - Investment Banking & Investment Services" which it clearly isn't. Financials are such a broad sector that I don't think in practice you would see much correlation between (say) CMC Markets (LON:CMCX) Mercia Asset Management (LON:MERC) and PayPoint (LON:PAY) - which incidentally is classed as an 'industrial' stock providing "Professional & Commercial Services."
I was a bit saddened to see so few manufacturers in the selection. I think British manufacturing is a success story deserving of support and if someone as experienced as Graham doesn't include any in his list, that perhaps says something about perceptions of manufacturing and engineering. NB this is absolutely not a criticism, Graham is completely unbiased and is just sharing his selection process, which is fascinating.
Yes but a lot of stocks are in the wrong sector, IMO. How can Wise (LON:WISE) be industrial, it should either financial or technology. Next (LON:NXT) was in the Technology sector last year. Anyway that is why l put financials in " ". Anyway a lot financial related stocks, this is not a criticism, just an observation.
A fair point Rusty. I hope that the financials are at least reasonably well-diversified in terms of what they do:
Last year, I had 3 investment banks in the list.
This year, I could have very easily put 3 fund managers in the list!
Next, I'll eliminate nicotine-related risk with SUPR.
Graham I’m not sure where you are coming from here. Isn’t Supermarket Income REIT (LON:SUPR) a REIT that leases supermarket sites to the major retailers (Tesco, Waitrose, Sainsburys). I think you might have meant Supreme (LON:SUP? which sells Vaping products among other product ranges.
Hi, this has been fixed. Cheers!
Excellent read Graham - thanks for explaining your reasoning. Interesting to hear that- as the selections were reduced to close to your final two - the choice got harder. This reminds me of my amateur video editing days - from a holiday in South Africa, I ended up with 6 hours of video footage. To reduce this to 3 hours was fairly simple. then a few iterations later, at 90 minutes duration . .... it took an eterninty to reduce this to 45 minutes (the most I think it reasonable to ask friends to watch a holiday video for).
Hope for more great articles in 2024.
ATB
Geoff
Great article Graham, nice to see two stocks I hold on your list! Cavendish Financial (LON:CAV) and PayPoint (LON:PAY)
all the best for for 2024!