Ten small-cap value and growth ideas for 2025

It’s that time of year when I publish my watchlist for the year ahead.

Before that, though, I need to review how my 2024 watchlist has fared. Hopefully there are no major developments between the day of writing this (20th December) and year-end.

The stocks on the 2024 watchlist were:

• A G Barr (LON:BAG)

• Cavendish Financial (LON:CAV)

• CMC Markets (LON:CMCX)

• Mercia Asset Management (LON:MERC)

• Mortgage Advice Bureau (Holdings) (LON:MAB1)

• Nichols (LON:NICL)

• PayPoint (LON:PAY)

• Peel Hunt (LON:PEEL)

• Polar Capital Holdings (LON:POLR)

• Trustpilot (LON:TRST)

Many of these companies were on the 2023 list.

However, during 2023, Numis (NUM) was delisted due to a takeover, and I turned neutral on S&U (SUS). I also decided that I did not have enough conviction in the continued strong performance of MS International (MSI) to keep it on the list.

Those three stocks were therefore replaced by CMCX, PAY and POLR - they were the new entries for 2024.

Ten small-cap value and growth ideas for 2024: A Review

A G Barr (LON:BAG) (£675m) - total return 21% year-to-date.

This IRN-BRU maker was last covered in the daily report (then known as the SCVR!) back in July. Thankfully there has not been much news from BAG this year. The recent interim results showed 5% revenue growth and 8.5% adjusted PBT growth. Unfortunately the results did include £4.4m of costs under the headline “business change projects”, as the company closed its direct delivery service for retailers and integrated the energy drink company Boost.

The shares currently trade on a forward PE of 14x and I could easily leave this on the list for 2025, hoping for another solid performance. However, I am not satisfied with the CEO appointment in May 2024: it might not be this individual’s fault, but every company he has steered before has had serious troubles. White it might not all have been his fault, I prefer to back CEOs who have a career track record of good fortune.

Cavendish Financial (LON:CAV) (£38m) - total return minus 17% year-to-date

After this share treaded water in 2023, the market was disappointed in 2024 with the continued lack of action in the IPO London market Interim results (covered in November) showed signs of life with revenues up over 40% to £28m. After share-based payments to staff, however, there was little left in terms of profitability.

The company’s cash balance finished the period at £18m. Therefore having an enterprise value of only £20m and with this new Cavendish entity being the combination of both Cenkos and finnCap, it continues to offer some value in my view.

In the bubble years, finnCap was able to generate revenues of £50m and net income of c. £7m alone. Now with finnCap and Cenkos executives working together, their combined earnings power in a good year should make a £20m enterprise value seem very small indeed.

The problem of course is that no one can predict when the boom times in UK small-caps might return again. More patience is likely to be needed.

CMC Markets (LON:CMCX) (£714m) - total return 153% year-to-date

One of the new entrants for 2024, this was the best-performing share on the list as this spread betting and CFD company benefited from surging net operating income and tight cost control.

Its very strong and liquid balance sheet worth around £400m was a boost to the conviction I had in the share a year ago.

Looking forward, I’m inclined to leave this one on the list. The valuation is in a different place compared to a year ago but I don’t consider it to be overheated. It has funds of £332m and so on an enterprise value basis it remains cheap. For example, Stockopedia calculates its trailing EV/EBITDA multiple as 3.8x. By this metric it is cheaper than IG Group (IGG) (which I hold) (6.2x) and is similar to Plus500 (LON:PLUS) (4x).

Some might argue that it’s no longer a small-cap and that’s fair enough - but I would like to let this winner run and see what happens next!

Mercia Asset Management (LON:MERC) (£124m) - total return minus 2% year-to-date

This one continues to drag slightly on performance but I remain interested in the value opportunity here. It’s a hybrid investment where there is both a direct investment portfolio (fair value £121m as of Sep 2024) and a growing fund management business with £1.65 billion of funds under management. Funds are split across venture capital (£950m) and debt (£670m) plus a small chunk of private equity.

With every fund manager I want to know what is its niche, and in the case of Mercia the niche is that it targets investments across the regions, without a London bias. See here for a list of locations. I last reviewed it in early December and was satisfied with the year-on-year growth in the fund management business.

One risk factor worth noting is that the direct investment portfolio is somewhat concentrated with the largest three positions being valued at c. £16m, £15m and £12m.

Mortgage Advice Bureau (Holdings) (LON:MAB1) (£124m) - total return minus 22% year-to-date

This one had a very strong 2023 (returning 60%) but has given back some of these gains in 2024.

It is the UK’s leading mortgage intermediary and operates on a franchise basis, which tends to result in very strong quality metrics for its shareholders. It has a market share of new mortgage lending of about 8%.

Interim results to June showed revenues up 5% (£124m) and adj. PBT up 40% (£9m).

Higher interest rates and the absence of further rate cuts have been an impediment to lending and have held back MAB1’s volumes this year. However, the company is equally active in refinancing and this side of the business helps to anchor overall performance.

The company had a modest net debt position as of mid-September of c. £7m.

I’m inclined to leave this on the list for a third year in a row, as it trades on a PER of about 15x and will stand to benefit whenever new mortgage or refinancing volumes pick up. Both mortgage types have been on the decline and yet MAB1’s results have remained resilient. I continue to eagerly look forward to seeing how it would perform in a stronger mortgage market.

Nichols (LON:NICL) (£475m) - total return 22% year-to-date

The second drinks company on the watchlist, this delivered another positive return in 2024.

I reported on Nichols’ interim results in July, when Nichols and its flagship brand Vimto delivered a strong adjusted PBT result (+18% to £14.5m) despite a small reduction in sales. A £20m special dividend was declared, along with an increased interim dividend.

In November, the company held its Capital Markets Day and laid out its medium-term ambitions. These included total revenues of £225m (2024 consensus £173m), a PBT margin of 20% (2024 consensus 17.5%) and adjusted PBT of at least £45m (2024 consensus: £30m).

The main route to growth seems to be international expansion - Vimto is very popular during Ramadan in the Middle East. According to an article in the Manchester Evening News (link), it is thought that “its mixture of berry and sugars gives those who have been fasting for long hours a much needed energy boost”.

The P/E multiple for NICL has increased to nearly 20x but net cash after the recent dividends is £45m, plus whatever cash flow has been generated in H2. I’m happy to leave this on the watchlist.

PayPoint (LON:PAY) (£545m) - total return 54% year-to-date

This was a new entrant to the list for 2024 and I’m very glad that I chose it!

The most recent coverage it enjoyed in our daily report was in November, when Roland commented on “a seemingly mild profit warning, with full-year results now expected to be at the lower end of expectations”.

The core of this business is the multi-functional terminal you find in convenience stores. It also has a digital payments platform, a bill payment service that’s in structural decline, a store-based parcel service (Collect+) and the Love2shop gift voucher business.

I’ve been a fan of this business for many years. After the recent mild profit warning it’s back at a forward PER of about 10x. Some net debt (£85m) needs to be carefully managed but I’m comfortable leaving this on the watchlist, as I don’t believe the valuation has overheated yet.

Peel Hunt (LON:PEEL) (£123m) - total return minus 12% year-to-date

As with Cavendish, PEEL has had a tough 2024 due to the dearth of activity on the London Stock Exchange.

But as with Cavendish, there has been an uptick: recent interim results (covered in November) showed revenue up 26% (£54m) and a small pre-tax profit (versus a pre-tax loss in the corresponding period a year ago).

As various charts I shared in November illustrated, there has been an almost-total absence of fundraising activity both on the Main Market and on AIM since 2022.

I can understand why investors would lose interest in the brokers in these conditions, but I’m happy to let this stay on the watchlist for the possibility that conditions might improve. PEEL has net assets of £95m, supporting most of the current market cap.

Polar Capital Holdings (LON:POLR) (£517m) - total return 19% year-to-date

This was the third new entrant to the list in 2024, along with CMCX and PAY.

I view Polar as a premier active fund manager in the UK, and it has the positive net flows to back this up.

H1 results, covered in the daily report in November, prompted analysts to upgrade their forecasts. It is now expected to see a “core” operating profit of £53.9m for FY March 2025.

Relative to AUM this fund manager is very expensive compared to its peers: you only get about £46 of AUM for every £1 invested in POLR stock. At something like LIO you get £85 of AUM for every £1 invested in the stock.

But I picked POLR for its quality and I’m happy with that decision. On an earnings basis it is still trading at a reasonable multiple (PER c. 11x). Therefore even if net flows were to reverse and become negative in the short-term, I think this is a pretty comfortable hold.

Trustpilot (LON:TRST) (£1.3bn) - total return 107% year-to-date

This has been the biggest winner in my watchlist over two years.

In 2023 it generated a return of nearly 54%. This year, it has more than doubled. It has been a remarkable journey.

However, all good things must come to an end and I’d like to “take profits” from this now and remove it from the watchlist.

In September, at a market cap of less than £900m, I was still comfortable with my positive stance. Trading was at the top end of expectations as the company moved into an operating profit. Another share buyback for £20m was announced.

Today, with a market cap of £1.3 billion, I no longer feel relaxed about the valuation. The price to sales multiple is 8x. The P/E multiple isn’t relevant but for context it is 94x. The ValueRank is 2.

It has been a wonderful ride and I will not be surprised if this one continues upwards. However, if it does keep going, I think it is at risk of becoming unmoored from valuation. Perhaps it can go on the watchlist again for 2026, but for now it’s out.

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So there you have it: a review of my 2024 watchlist!

As things stand, the average total return of these ten shares in 2024 is over 32%.

I am shocked that they appear to be beating the average total return of the 2023 watchlist, which was c. 28%.

The simple explanation is that there were two big winners (CMCX and TRST) and no huge losers. I would have been happy to see an average 10% return.

• FTSE All-Share Total Return in 2024 year-to-date: 8.3%

• AIM All-Share Index change in 2024 year-to-date: minus 7%

• GN’s 2024 Watchlist Total Return in 2024 year-to-date: 32.4%

Ten Small-Cap Value and Growth Ideas for 2025

With that review out of the way, it’s time to publish my 2025 list.

As before, I’m leaving the list unchanged except where I have particular reasons to make changes.

I no longer see much value in TRST and so I am removing it from the list.

The CEO appointment at BAG has put me off, so I’m removing that, too.

This leaves two openings to fill.

After reviewing all the stocks I’ve been positive on in recent months, I’ve decided that the two openings will be filled by: International Personal Finance (LON:IPF) and Impax Asset Management (LON:IPX) (please note that I have a long position in IPX).

So there you have it! My watchlist for 2025 is:

• Cavendish Financial (LON:CAV)

• CMC Markets (LON:CMCX)

• International Personal Finance (LON:IPF)

• Impax Asset Management (LON:IPX)

• Mercia Asset Management (LON:MERC)

• Mortgage Advice Bureau (Holdings) (LON:MAB1)

• Nichols (LON:NICL)

• PayPoint (LON:PAY)

• Peel Hunt (LON:PEEL)

• Polar Capital Holdings (LON:POLR)

As usual, I am concentrated into just a few sectors of the market. This is not an attempt to create a diversified portfolio!

And after two years of exceptional good fortune, I have no expectation of more good fortune in 2025.

Once again, I would be delighted if the stocks on this watchlist generated an average total return of 10%. But this is firmly beyond my control.

And with that, there is nothing more for me to do but to wish you, your family and your portfolio a Merry Christmas and a Happy New Year! Thank you for reading.