We all know that investing in small-cap shares can be very rewarding, both financially and egotistically. Some of you may even know someone that has boasted about their stock-picking talents after profiting handsomely from a ‘hidden gem’ they read about in some publication or other. What they perhaps won’t tell you is that they subsequently lost a whole heap of money on the next under-the-radar stock they happened to read about.
A little excitement
Small-cap investing can indeed be very rewarding, but also very dangerous. That’s why I always advocate allocating only a small portion of your portfolio to smaller companies that may be trading outside the FTSE 350 or even on London’s junior AIM market. That way, not only will you be able to add a little excitement to your portfolio, but also sleep a whole lot better at night too.
With that in mind, one relatively unknown company that I recently came across is Zotefoams (LSE: ZTF). The Croydon-based high-tech foams manufacturer is listed on London’s Main Market, but with a market value of £138m sits outside the FTSE 350 index. Zotefoams was spun off from BP Chemicals in 1992 after a management buyout, and was immediately successful, later joining the London Stock Exchange in 1995.
Barriers to entry
It is now the world’s largest manufacturer of lightweight cross-linked polyolefin block foams, and additionally sells and licenses high-performance products and microcellular materials technology. The company has an impressive track record of revenue and earnings growth, and has been progressively increasing its dividend payouts since 2003.
The business has significant barriers to entry, including capital cost, knowhow, user specifications and patents. City analysts are forecasting earnings growth of 14% and 17% for 2017 and 2018, leaving the shares trading on a P/E of 17.5. This is well below the five-year average of 21.9, and in my view represents significant upside potential.
Overvalued?
For those of you who like their speciality chemical firms to be big, then they don’t come much bigger than Croda International (LSE: CRDA) – at least in this country. The East Yorkshire-based firm produces a wide range of chemicals used in products such as skincare and bodycare, omega-3 oils, and fatty acid amides which add slip to plastic surfaces, so plastic bags can be peeled apart easily.
The FTSE 100 stalwart has a long history of steady growth, and investors have long been keen to get on board this ever-expanding global giant. But the share price has soared in recent years, and again reached record highs this month, leaving the shares a tad overvalued in my opinion.
I still believe Croda remains a great long-term prospect, but with the share price up around 34% since last June, and trading at 23 times 2017 earnings, I would be inclined to wait for a better entry point.