It used to be conventional wisdom that smaller companies’ shares would generally outperform those of their larger peers. The main reason for this was that smaller companies grow faster, which would be reflected in their share price performance.
As far as investors in UK stocks are concerned, this has not held true in recent years. Over the past three years, the FTSE Small Cap index has returned just 6.1%, trailing the blue-chip FTSE 100 index’s 31.5%.
There are various reasons as to why this has happened. The UK stock market is declining in significance, while pension fund managers have been investing mostly in bonds. A stagnant UK economy, stubbornly high inflation and rising interest rates have not helped matters either.
As investors have shunned UK shares, others have claimed the stock market has become undervalued, with growing takeover activity being used to support this view.
As with all markets, there tend to be pockets of opportunity. Here, we examine the 10 UK small-cap stocks – those outside the FTSE 100 and FTSE 250 – that are most popular with the top-performing fund managers tracked by Citywire Elite Companies. On average, they have returned 30% over the past year, well ahead of the FTSE Small Cap’s flat performance.
Source: FactSet. PE = price-earnings ratio, based on earnings forecasts for next 12 months.
Ashtead Technology
Ashtead Technology’s (GB:AT) shares have been on a tear, returning 124% over the past year. Profits have been booming in its oil and gas and renewable energy markets, with earnings forecasts increasing dramatically.
Ashtead rents equipment used across the lifecycle of offshore oil and wind installations. The technology products comprise surveying equipment, sensors and robotics used for installation and operation, maintenance and the decommissioning of assets.
The vast bulk of its rental fleet can be switched between oil and gas and wind projects, which keeps utilisation rates high. The company has a presence in all the key global markets with a blue-chip customer base.
With investment in oil and gas fields remaining robust, along with an expected boom in offshore wind installations, the company is confident of double-digit percentage increases in revenues over the medium term. Further growth is expected from bolt-on acquisitions and decommissioning.
The company generates impressive profit margins of more than 30%, with returns on invested capital above 25%. With record order backlogs, the outlook remains very promising.
Ashtead Technology’s Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Yellow Cake
Yellow Cake (GB:YCA) buys and holds physical uranium at storage facilities in France and Canada. Its shares have risen 56% over the past year as the uranium price has soared, climbing 85% over the same period.
The company remains very upbeat on the outlook for the uranium price. The market is undersupplied due to production delays from mines and disruptions from the war in Ukraine. Prices are also supported by low levels of industry stocks.
Longer-term support comes from the increasing demand for nuclear power as countries clamour for clean and secure energy sources. The International Energy Agency predicts the installation of nuclear power stations globally will double by 2050.
Yellow Cake will use its financial strength to purchase a further 1.5 million pounds of uranium from Kazakhstan in June for $100m. This will take its holdings up to £21.7m.
At 617p, the shares trade at a 27% discount to their estimated net asset value (NAV) per share of 840p on 23 January.
Yellow Cake’s Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Forterra
Last year was tough for Forterra (GB:FORT), the UK’s largest brickmaker. Higher mortgage rates led to a sharp downturn in housebuilding activity, with brick dispatches ending the year at their lowest levels since 2009.
The company has been trying to prop up its profits by cutting production but analysts have been sharply revising down their forecasts of its future profits. This has fuelled a 22% fall in the shares over the past year.
With the share price almost back to the level of the company’s initial public offering in 2016, investors hope the worst is over and better days lie ahead.
Forterra’s key attraction remains its new Desford factory in Leicestershire, which adds a huge chunk of new capacity. This enables it to take market share from imported bricks in a market with few domestic suppliers.
Forterra’s Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Coca-Cola Europacific
Coca-Cola Europacific (GB:CCEP) has carved out a reputation as one of Coca-Cola’s most successful bottling operators. It has the rights to produce and sell Coca-Cola drinks in the UK and much of Western Europe. It has recently closed a deal to do the same in the Philippines, which gives it a platform to grow in East Asia.
Consumer goods companies are having a hard time increasing sales as cash-strapped buyers consume less or trade down to cheaper private-label alternatives.
However, the Coca-Cola brand portfolio has proven to be more resilient, with some volume growth last year but, more importantly, the ability to raise prices to offset rising costs.
Coca-Cola Zero Sugar continues to grow steadily, while the Monster energy drink brand is delivering even stronger growth.
With high-profile sporting events such as the Paris Olympics and the Euro 2024 football tournament featuring Coca-Cola’s sponsorship this year, Coca-Cola Europacific expects continued growth. Further cost savings are expected to help the company continue to generate steady earnings growth in the years ahead.
Coca-Cola Europacific’s top Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Georgia Capital
Georgia Capital (GB:CGEO) is an investment company that invests in and develops businesses in Georgia. It had a strong 2023, with the value of its investment portfolio growing by nearly 15%. The income generated from its portfolio companies was used to reduce debt by almost a quarter and buy back 5% of its shares. The result was a 20% increase in NAV per share.
It seems the stock market is warming to the shares despite the close proximity of Georgia to Russia. Georgia’s economy grew by 7.5% in 2023 and provides a strong foundation for businesses to prosper, which bodes well for further NAV growth. Georgia Capital’s shares have gained 50% over the past year.
Further debt repayment and share buybacks are likely, yet the shares still trade at a 53% discount to NAV. This discount has been narrowing and if the trend continues the shares could post further strong gains.
Georgia Capital’s Elite Investor
Sources: Citywire/Morningstar, latest holdings data.
Greencore
Greencore (GB:GNC) is the UK’s largest maker of prepackaged sandwiches. It sells these to supermarkets, convenience stores and food service companies, along with salads, soups, sushi, sauces and ready meals.
Its business was hammered by the pandemic as office workers stayed at home and sandwich sales collapsed. Greencore is now benefiting from a return to offices, improving its manufacturing efficicncy, and getting rid of unprofitable sales.
It has created a more collaborative partnership with its supermarket customers by securing increased protection from cost increases in its contracts while helping to develop more premium sandwiches for them to sell.
The steady growth in the food-to-go market combined with higher margin premium product sales and more self-help bodes well for Greencore. It should help it grow its earnings per share at an average rate of more than 10% per year for the next few years.
The shares trade at 10.3 times forecast earnings for the next 12 months, at a price of 102p.
Greencore’s Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Jet2
Jet2’s (GB:JET2) profits and shares continue to climb. The company’s recovery from the pandemic has been impressive, while its investment in new aircraft, underpinned by its reputation for excellent customer service, is helping it continue to take market share from rivals.
Jet2’s latest trading update last month confirmed the business is in rude health. It is adding more seat capacity and filling it at higher prices, alongside selling more higher-margin package holidays.
Despite Jet2 facing some cost headwinds in the form of higher hotel prices and carbon costs, analysts are increasing their profit forecasts, which is helping to raise the rating of its shares.
But a price-earnings ratio of 7.8 times forecast profits for the next 12 months, at a share price of £14, still looks historically cheap. This suggests the shares’ rerating could have further to run.
Jet2’s top Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Read more: Top investors flock to Jet2’s cheap shares as profits surge
Conduit
Conduit (GB:CRE) has quickly established itself as a fast-growing property and casualty reinsurance underwriter. Last year was stellar as it increased its gross written premiums by nearly 50%.
With much reduced losses, profits rose substantially, leading to a very impressive return on equity of 22%. This is high for a property and casualty insurer and is not expected to last. That said, analysts still expect Conduit to return more than 15% over the next few years.
The company remains confident there is still plenty of profitable business to win in its markets. However, it believes the risk-reward trade-off is better in property and specialist lines of reinsurance than in casualty markets and is directing its efforts accordingly.
At 517p, the shares trade on a forecast price-to-book value of 0.9 times. If it can maintain its impressive returns on equity, this valuation is arguably too low.
Conduit’s Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Card Factory
Card Factory (GB:CARD) is performing reasonably well in a very competitive UK marketplace. It delivered strong growth in its key Christmas trading period, which means the full-year profit forecast should be met comfortably.
That said, the business still faces challenges. Sales are falling in its online business, which faces strong competition from faster-growing rival Moonpig (GB:MOON).
But while Card Factory’s expected growth lags that of Moonpig, its shares are much cheaper. A price-earnings ratio of 6.4 times forecast earnings over the next 12 months is less than half Moonpig’s 14.6 times.
Card Factory’s Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
Costain
Construction shares are seen as risky bets for investors. The implosion of Carillion in 2017 damaged the reputation of the sector, where thin profit margins can be wiped out very quickly when something goes wrong.
Costain (GB:COST) had to shore up its finances in 2020 with a cash call to its investors. Since then its profits have recovered.
The company is a play on increased UK infrastructure spending. Of its two businesses, its water, energy and defence division looks more attractive right now.
It has been winning contracts to help deliver new assets for water companies and electricity grids. Meanwhile, its transport division has been buffeted by the chaos surrounding the HS2 rail project.
Costain’s balance sheet looks to be in decent shape, while an ambition of lifting margins from 3% to nearly 5% over the next few years supports its current profit forecasts.
Costain’s top Elite Investors
Sources: Citywire/Morningstar, latest holdings data.
