One of the hugely appealing aspects of smaller companies is their potential to post stunning capital gains. Certainly, they may be riskier than their larger peers and not offer the same degree of size, stability and resilience as industry leaders. Furthermore, they may be more dependent upon a smaller number of customers, may lack regional diversity and their financing may not be as secure. But, for investors who can live with higher relative risk, the rewards can be superb.
One stock which has performed exceptionally well this year is Fastjet (LSE: FJET). Its shares have risen by 38% since the turn of the year and, as reported today, August has been a record month for the Africa-focused budget airline. In fact, it carried over 76,000 passengers in August, which is a 17% increase on the same month in 2014 and is at least partly because of the new routes to Malawi that were introduced in July, as well as increased frequency of flights on a number of other routes, too.
And, while Fastjet’s load factor (the proportion of seats taken by passengers) fell from 79% to 75%, the company’s bottom line is set to turn from loss to profit next year. This, it seems, is having a positive impact on investor sentiment and, even though its shares have risen strongly in recent months, Fastjet still trades on a forward price to earnings (P/E) ratio of just 7.9. This indicates that while it is a relatively high risk stock, its margin of safety is wide enough for less risk averse investors to consider investment.
Meanwhile, the performance of Falkland Oil And Gas (LSE: FOGL) has been much better than that of most of its rivals. Its shares are flat for the year which, given the horrific performance of the oil price, is a strong result. A key reason for this has been upbeat news flow regarding its drilling programme and, with Falkland Oil And Gas being relatively well financed, it seems to hold considerable appeal for investors seeking a smaller oil exploration play.
Certainly, its losses may have widened in its most recent results and there have been delays to drilling at the Humpback exploration well. But, with two successful drilling operations already having been made at Zebedee and Isobel Deep, Falkland Oil And Gas appears to be an appealing exploration stock for the long term.
Smaller companies can, of course, disappoint. On this front, mobile payments company Monitise (LSE: MONI) is a prime example since its shares have tumbled in value by 77% since the turn of the year. This is somewhat puzzling for investors, since the company has a number of major, blue-chip customers and has a fine product. However, it seems unable to become a profitable entity which, in the long run, is its sole reason for existence.
Clearly, the current management team is working hard to move Monitise into the black, with a cost-cutting drive likely to have a positive impact on its financial performance. However, until further evidence is provided on this front, it seems prudent to watch the stock rather than buy – especially since it has issued multiple revenue warnings in the last year.