Buying and holding small-cap growth stocks can be an extremely lucrative strategy. However, a small-cap strategy is also precarious as early-stage companies are often unprofitable and tend to rely on shareholders for financing to keep the lights on.
Still, if you do your research and spend time carefully choosing the most attractive small-caps, the returns available can be life changing.
Redt Energy (LSE: RED) is just one small-cap that may have the potential to revolutionise your portfolio’s returns. Formally known as Camco Clean Energy, Redt develops energy storage technologies, and while the company is still in its early stages, there’s been plenty of positive news flow over the past 12 months.
Redt is planning to ramp up the production of its liquid vanadium energy storage units over the next two years and as the company develops its manufacturing capacity, the cost of production per unit is expected to decrease considerably.
According to management, there’s already plenty of interest in the units from industrial groups, and City analysts expect big things over next two years. Sales of just £3.4m are expected this year but for 2017 analysts have pencilled-in sales of £18.5m, a staggering growth rate of over 400%. The City expects Redt’s pre-tax loss to narrow significantly over the next two years falling to £1.2m for 2017 with a profit expected in the years after.
With such an impressive growth rate on the cards, Redt could be one company to watch going forward.
Debt deal
The market seems pleased with a debt restructuring deal announced by Iofina (LSE: IOF) this morning with shares in the company rising by 10% in early trade. The restructuring deal will see the maturity date of Iofina’s existing convertible debts of $20m extended to 2 June 2019, and interest rates will be lowered from 6% to 5%. What’s more, to help with cash flows under the terms of the new agreement accrued interest will be rolled up into the loan principal so it can be paid at maturity.
Along with this new debt deal, one of Iofina’s existing creditors Stena Investment has agreed to extend an additional $10m credit line to the company to finance expansion plans. The details of this new credit deal are expected to be finalised within the next 30 days.
When it comes to small-cap investing, it’s often best to avoid the companies with high levels debt as if things don’t go to plan, shareholders will have to foot the bill for the company’s excessive spending. For example, right now if Iofina’s existing loans were converted, the debt would equate to around 45% of the group’s existing share capital.
A long way to go
Early-stage miner Amur Minerals (LSE: AMC) is another high-risk play. The company is still in the early stages of developing its nickel/copper Kun-Manie prospect in Far East Russia. Even though recent drilling results showed a higher grade of ore than was initially expected, Amur has a long road ahead of it before it can bring the mine into production. Indeed, last year the company informed the market that it would cost an estimated $312m to develop a permanent access road to the nearest suitable rail line for Kun-Maine.
With a market cap. of only £25m, Amur is facing the prospect of taking on a near-crippling amount of debt just to fund the construction of the access road.