Interactive Investor

35 small-cap stocks to own in 2022

12th January 2022 13:25

Graeme Evans from interactive investor

Last year’s share tips beat the FTSE 100 and FTSE All-Share. Can this team of experts beat the market this year too?

Small-caps Galliford Try (LSE:GFRD), Superdry (LSE:SDRY), MusicMagpie (LSE:MMAG) and Lookers (LSE:LOOK) have been backed for 2022 success after a City firm revealed its pick of 35 stocks worth under £300 million.

Thirteen sectors are represented on Peel Hunt's list, with mining the most popular based on recommendations for Horizonte Minerals (LSE:HZM), Capital Ltd (LSE:CAPD), Gensource Potash (LSE:GSP), Serabi Gold (LSE:SRB) and Wiluna Mining (ASX:WMC).

Its analysts also picked four stocks from the oil and gas sector after the selection of IOG (LSE:IOG), Pharos Energy (LSE:PHAR), SDX Energy (LSE:SDX) and Wentworth Resources (AQUIS:WEN.GB). In addition, there are four stocks each from support services and the travel and leisure sector.

Covering a variety of growth, income and value characteristics, the stocks trade on a median 11.4 times 2022 earnings and dropping to 9.2x for 2023. Their average dividend yield is 1.6% for this year and 1.9% the year after.

Peel Hunt's 30 top small-cap selections from last year delivered an average total return of 19.4%, which is marginally ahead of the FTSE 100 and FTSE All Share’s 18%.

The best-performing selection of Alumasc (LSE:ALU) retains its place on this year's list, even after a rise of 117% in 2021. The sustainable building products business is now leaner and more streamlined, but Peel Hunt believes it is still under-appreciated by the market on 9.5 times forecast earnings, particularly given the potential for bolt-on acquisitions to accelerate growth.

The broker has a price target of 295p, which compares with 233p seen on Friday.

International Personal Finance (LSE:IPF) the home credit and consumer finance provider, is another of 2021's strong performers on this year's list as Peel Hunt believes the current share price materially undervalues a much-improved outlook and return to dividends.

The broker said: “Having emerged from a period of elevated uncertainty, the business is in robust health, with credit issued growing, the balance sheet in good shape, and returns on an improving trend.”

The stock, which is on seven times 2022 earnings and yields 5%, has a target price of 165p compared with 133p at the end of last week.

One of the biggest potential share price upsides on the Peel Hunt list comes from Faron Pharmaceuticals (LSE:FARN), a Finland-based biopharma focused on harnessing the power of the immune system to tackle cancer and inflammation.

Peel Hunt said: “For investors looking for high growth in healthcare, we are particularly enthused by Faron’s unique approach to modulating the immune system to help tackle cancer and Covid-like diseases.

The broker said capital is required for commercialisation, but so far clinical data are very promising as Faron starts to engage regulators to gain approval and broaden the patient groups that can benefit from its treatments.  The target price of 524p compares with 300p on Friday.

There's a mix of new and old within Peel Hunt's picks following the inclusion of recently listed ProCook (LSE:PROC) and MusicMagpie alongside veteran stock market company James Fisher (LSE:FSJ).

The marine services business, which became a public company in 1952, is expected to show some profit improvement after Covid-19 created a near-perfect storm for the group. The shares are 439p, but Peel Hunt has upgraded to a “Buy” recommendation based on a 550p target price.

The backing for MusicMagpie, which buys, refurbishes and resells tech and media, reflects expectations for its market to expand 15% a year. And as a “highly trusted” name in the circular economy, Peel Hunt believes investors should take note of the company's ESG credentials.

Shares closed last week at 166p compared with the broker's 233p target price. ProCook, meanwhile, is backed to reach 200p from 151p as the direct-to-consumer kitchenware brand targets new territories such as France and Germany on top of its strong UK growth.

Other retailers on the list include Superdry at 12 times 2023 earnings, which Peel Hunt believes looks cheap against the wider consumer sector and fails to reflect longer-term prospects.

The broker said: “Recovery is a journey back to profits of £40-50million, secured by steady improvements in trading revenues. It is unlikely to be a linear journey, but there are enough green shoots from the new ranges, new format stores and recent trading to give confidence in the direction of travel.” Shares finished last week at 268p but are backed to reach to 375p.

In car retail, Peel Hunt notes that Lookers trades at 6.8 times 2022 for a discount to rivals Vertu (LSE:VTU) and Pendragon (LSE:PDG). This is despite the company “consistently” outperforming the new car market and benefiting from a steady stream of upgrades over 2021.

Peel Hunt said: “We expect these conditions to persist well into 2022. On the demand side, consumer interest in new vehicles and electric vehicles in particular remains strong.”

The building sector is represented by Galliford Try as the construction firm is regarded as a “low-risk play” on rising infrastructure and government spending. The quality of the order book, margin visibility and strength of the bid pipeline all underpin 2026 financial targets, with Peel Hunt looking for shares to reach 230p from 177p.

The other small-cap stocks on the broker's list are Eurocell (LSE:ECEL), Gaming Realms (LSE:GMR), IDOX (LSE:IDOX), Inspired (LSE:INSE), John Menzies (LSE:MNZS), Lok'n Store (LSE:LOK), Loungers (LSE:LGRS), Mears (LSE:MER), Morses Club (LSE:MCL), Norcros (LSE:NXR), Renold (LSE:RNO), Revolution Bars (LSE:RBG), STV (LSE:STVG), Ten Entertainment (LSE:TEG), Ten Lifestyle (LSE:TENG), Town Centre Securities (LSE:TOWN) and Trifast (LSE:TRI).

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.

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