Interactive Investor

27 favourite small-cap shares for 2024

This analyst reveals its annual list of smaller stocks with attractive growth, recovery or financial fundamental characteristics. Six of them have forecast dividend yields above 5%.

17th January 2024 13:53

by Graeme Evans from interactive investor

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Small-caps including Galliford Try (LSE:GFRD), Avon Protection (LSE:AVON) and Speedy Hire (LSE:SDY) have been backed for 2024 success after a City bank named its 27 top picks worth under £300 million.

Peel Hunt’s annual list of smaller stocks with attractive growth, recovery or financial fundamental characteristics includes six with projected dividend yields above 5%.

The bank said: “While the appetite for smaller companies is still relatively mixed, there are clearly some very good opportunities to invest in attractive businesses that are undervalued.”

Last year’s list was topped by Ashtead Technology (LSE:AT.), which delivered a total return of 95% ahead of International Personal Finance (LSE:IPF) at 78% and Ten Entertainment Group (LSE:TEG) at 69%, as Peel Hunt’s  picks for 2023 saw an 18% weighted-average return.

The worst selections were Superdry (LSE:SDRY) and MusicMagpie (LSE:MMAG) after declines of 73% and 51% respectively.

Some of the stocks in this year’s list are already off to a flying start following new year updates by household cleaning products firm McBride (LSE:MCB) and the construction business Galliford Try.

McBride yesterday lifted half-year profit guidance after reporting revenue growth of 9.9% as consumers offset cost-of-living pressures by using more private label products.

Peel Hunt increased its price target from 100p to 108p as a result, having already seen the company’s valuation more than double since mid-October to this afternoon’s 79p.

The bank said: “We see the current trends as likely to sustain given the pressure on consumer budgets. The shares have responded but the rating is still low.”

There was similar progress by Galliford Try today after it sweetened the improved guidance given at September’s annual results. With good visibility over the second half, revenues are 5% stronger than market forecasts with an equivalent increase in expected pre-tax profit.

Shares rose 9p to 250p in today’s otherwise downbeat session, taking gains for the past year to 50%. However, Peel Hunt believes the shares have the potential to reach 300p, having added 20p to the target price disclosed in its small-cap list.

The house broker said: “The potential to deliver both strong growth and improving quality of earnings and strong shareholder returns is not reflected in an undemanding valuation.”

Galliford Try’s 2024 dividend yield of 9.5% is the highest on the small-caps list, followed by International Personal Finance on 8.2% and Topps Tiles (LSE:TPT) and Speedy Hire both above 7.5%. The others above 5% are Brickability (LSE:BRCK) and London-focused property firm Helical (LSE:HLCL).

Encouraged by a new management team and a pipeline of contract opportunities, Peel Hunt sees the potential for Speedy Hire’s shares to more than double to 70p.

Other big share price upsides are seen at Gym Group (The) (LSE:GYM), where a recovery in average sales and 21% increase in like-for-like usage versus 2019 points to an “increasingly robust future”.

Shares are at 106.4p but Peel Hunt has a target of 225p, noting that a low valuation could attract the interest of a company looking to enter the UK market.

Bar operators Marston's (LSE:MARS)’s and Loungers (LSE:LGRS) are backed with significant upsides to 75p and 375p respectively, while On The Beach Group (LSE:OTB) is seen reaching 300p compared with today’s 156.6p.

The bank said: “Holidays spend is not really discretionary – UK consumers prioritise holidays and, reversing a trend, currently seem to prefer package holidays, with the protections that they bring.

“On The Beach last month reported a strong start to summer 2024 trading, and we forecast that it will maintain this.”

The stock on the list with the most potential is AFC Energy (LSE:AFC), which Peel Hunt sees accelerating to 125p as a new joint venture with Speedy Hire leads to a material number of hydrogen-powered generators being deployed around the UK.

It said: “2023 was a significant year for AFC Energy in preparing products for volume manufacturing and creating tangible routes to market.

“In 2024, we expect rapid expansion of product deployment, new commercial relationships and growing orders. Commercialisation has commenced.”

It also sees a recovery for former FTSE 250-listed Avon Protection, particularly as management has dealt with legacy issues in body armour and put the respiratory protection and helmets business on a path to a mid-teens operating margin.

The bank has a price target of 1,400p, which compares with today’s 944p and more than 4,000p in 2020 when the company was known as Avon Rubber and a hugely popular stock for retail investors. Peel Hunt said: “Confidence in the operational outlook, coupled with a strong demand backdrop, means we reiterate our Buy recommendation.”

The other stocks on the bank’s list are Afentra (LSE:AET), Platinum Capital Limited (ASX:PMC), MJ Gleeson (LSE:GLE), IDOX (LSE:IDOX)Jadestone Energy (LSE:JSE), LBG Media Ordinary Shares (LSE:LBG), Lok'n Store Group (LSE:LOK), NIOX Group (LSE:NIOX), Oxford BioMedica (LSE:OXB), Petra Diamonds Ltd (LSE:PDL), Renold (LSE:RNO), Ricardo (LSE:RCDO), Trifast (LSE:TRI) and Victorian Plumbing Group (LSE:VIC).

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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