Paul Scott’s Weekly Small Cap Snapshot

Here are some of Paul's key stock thoughts from the week

Some of you may have seen Paul Scott’s daily small cap blog on Stockopedia. Paul also researches small caps for our Small Cap Value Portfolio service, which has been running since Jan 2014.

We appreciate that not everyone has the time to read a lengthy blog each day, so a summary of Paul’s best small cap ideas might be interesting. Here are some of his stock thoughts from the week…

Somero Enterprises (AIM:SOM) – 150p

This company is the world leader in laser-guided concrete screeding machines (to lay perfectly flat floors, particularly important for large warehouses). I interviewed the CEO recently, an interview which confirmed my view that this is a terrific company, with trustworthy management, and priced at quite a bargain level.

Machine

The company reported excellent 2015 results on 1 Mar 2016, which I reported on here. Not only is the PER low, but the company also has a sound balance sheet holding net cash, and pays a decent & growing dividend.

So why are the shares so cheap? Investors may be worrying about China, but reduced business overseas was easily compensated for by booming business in its main market, the USA. We are also aware of the fact that this is a highly cyclical company, so it will undoubtedly suffer in the next recession, but so will plenty of other companies too!

Recent economic data from the USA indicates that recessionary worries are receding, so we think this share could have really good continuing upside over the next couple of years – providing the US economy remains reasonably buoyant.

Investor’s Champion also covered Somero in a recent Blog

 

Lakehouse (LAKE) – 51p

We generally keep away from IPOs, because so many seem to go wrong! However, there can be rich pickings once the price has crashed after bad news. It’s too early to be 100% sure, but we think Lakehouse exhibits characteristics which may see the shares recover somewhat in the future.

Revised broker forecasts might yet prove still too optimistic, but there’s bags of headroom within the price – at present the PER is only about 4, based on this year’s forecast earnings.
We waited until the share had put in a bottom, and begun to establish an up-trend, so this combined with our fundamental analysis, gave us the confidence to buy an opening position for the FAM Small Cap Value Portfolio this week.

Investor’s Champion also covered Lakehouse in a recent Blog

 

H&T (AIM:HAT) – 198p

Not everyone will want to own shares in a pawnbroker. However, the figures here really do look good. Not only are the shares rated on a modest forward PER of about 11, and paying a generous dividend yield of about 4%. However, there is also bulletproof balance sheet support – so the share price is backed up with solid tangible assets. There’s minimal bank debt, compared with the pledge book and inventories.

shop front

It’s very rare to find a share where investors can have a modest valuation on all three criteria at the same time – earnings multiple, dividend yield, and tangible asset backing.

Fund manager and CFA Charterholder Graham Neary recently produced an excellent research note on H&T Group for Investor’s Champion which can be download here 

 

Pennant (AIM:PEN) – 36p

This simulator company had a dreadful 2015, but is now well set up for a return to profit in 2016 and 2017, based on a strong order book, and reduced costs.
Whilst we have some concerns on corporate governance issues, we think there could be scope for a say 50% profit on this share, more as a trade than a long-term investment. It sounds from a recent announcement as if the company is close to reporting a major contract win, which could be the catalyst for a recovery.

 

Disclosures: Paul holds personal long positions in LAKE, SOM, and PEN.