Recession-proof UK stocks don’t exist

There’s no such thing as a recession-proof stock, but some stocks are more sensitive than others to the peaks and troughs — or booms and busts — of the business cycle. Cyclical stocks tend to follow the ups and downs in an economy. When a recession hits, cyclical shares tend to perform poorly and fall in price. On the other hand, defensive stocks are less affected by the economy. There are also sensitive stocks that fall somewhere in between. 

Defensive stocks can be found in the following sectors:

• Consumer defensive
• Healthcare
• Utilities

There are hundreds, if not thousands, of UK stocks in the consumer defensive, healthcare, and utility sectors. I can’t buy them all but I could look for a fund that invests in these sectors. Yet I would prefer to pick my own stocks. So I need something to help me select companies with a recession in mind. That something is quality.

Quality UK stocks

Quality stocks tend to have higher margins, profitability, and cash flow than their peers. Strong balance sheets and stable or improved business operations are also hallmarks of quality stocks. These features are sought after by investors when a recession is looming and during one. In my opinion, quality is never out of fashion.

Key quality measures

Two stocks have caught my eye for quality and defensive sector membership: healthcare stock Bioventix and AG Barr from consumer defensives. One quality non-defensive sector name also struck me as worthwhile. Given that I was looking for stocks to add to my stocks and shares ISA for a recession, this company’s business model had immediate appeal. That stock was FTSE 100 member Experian. The company owns a database of millions of consumers’ and businesses’ credit activity and repayment histories. It sounds like the sort of outfit that might see demand for its services holding up when the economy sours.

Taking stock of recession risks

I’m intrigued by these three stocks. They look good on measures of quality. Two are from defensive sectors, and one has a business model that seems like it should hold up well in a recession. So, do I buy these three UK stocks for my Stocks and Shares ISA? Not without further research.

Although consumers will likely cut spending on food and beverages less severely than on, say, eating out and cinema visits during a recession, will they switch from AG Barr’s brands to cheaper alternatives?

Bioventrix makes antibodies for diagnostic procedures and drug and compound detection. I want to know what proportion of its sales goes to organisations less likely to cut spending dramatically in a recession (like, for example, the NHS).

For Experian, although checking credit seems to make sense when times are tough, in a prolonged and severe recession, would reduced spending render its services redundant? These are some questions I must mull over before pulling the trigger on any of these three UK stocks. 

Here are two of what I believe to be the best AIM stocks to buy right now.

Gear4music

Online musical instrument retailer Gear4music (LSE: G4M) is a company whose value has more than halved in the last year. That seems rather overdone.

Sure, the company’s purple patch may be over now that Covid-19-related lockdowns are a thing of the past. Nevertheless, recent trading doesn’t justify such a huge fall, in my opinion.

Total sales hit £47.2m in the three months to the end of 2021, down from the £52.2m achieved in the previous year. Even so, it’s far better than the £40.3m recorded two years earlier. In other words, Gear4music has been steadily executing its growth strategy if we ignore the anomaly that was 2020.

There are headwinds to consider, of course. The rise in the cost of living may dent demand for discretionary items of the sort G4M specialises in, albeit temporarily. Growth in Europe has also been held back due to “short-term Brexit-related challenges“, it said.

There’s little G4M can do about the former. Nevertheless, the January launch of its new home cinema and hifi equipment site AV.com will give the company access to a whole new market and set of customers.

As far as the latter is concerned, business from the region should recover in the next financial year, supported by new distribution centres in Ireland and Spain. Analysts have taken this on board and now have the stock trading on 13 times forecast FY23 earnings.

I expect another trading update from Gear4music in late April. On balance, I’d be prepared to start buying today.

Bioventix

Another of the best AIM stocks to buy right now, in my opinion, is antibody supplier Bioventix (LSE: BVXP). Having tumbled over 25% in the last 12 months, its shares now trade close to the 52-week low. Again, this strikes me as a potential opportunity to acquire shares in a quality business when it’s (temporarily) out of favour.

Yesterday, the company announced revenue fell 8% to £4.73m in the second half of 2021. Much of the blame lies with the pandemic forcing hospitals to focus on other things other than clinical diagnostics. Pre-tax profit fared slightly better, dropping to £3.56m from £3.72m the year before.

Based on its attitude to dividends, management doesn’t seem fazed. Yesterday, Bioventix announced a first interim payout of 52p per share — up 20% on last year. This doesn’t sound like a company in trouble to me. Indeed, Bioventix continues to look financially sound with £5.1m in cash balances.

Of course, all results announcements are backward-looking. And, yes, there’s nothing to stop the share price from sinking lower if the rotation into value stocks continues.

On a positive note, new products are “moving into commercial development” and will add to revenues in time. The antibody troponin (used to identify heart attacks) also looks set to become a great source of growth moving forward.

All told, I remain bullish on Bioventix over the medium-to-long term. I’d be happy to buy this AIM stock today.

Zaven Boyrazian: Bioventix

Bioventix (LSE:BVXP) is a specialist producer of monoclonal antibodies. These are an essential ingredient for performing blood tests when diagnosing a patient. It’s undoubtedly a niche product but remains in high demand as revenues have consistently grown by double digits over the last five years.

Recently, the stock has taken a hit as hospitals have prioritised spending in areas dealing with Covid-19. Consequently, the group’s bottom line has suffered for it. But, with the vaccine rollout making good progress and the world adapting to the pandemic environment, these disruptions may soon be coming to an end.

As such, I think this could be an excellent addition to my portfolio.

Zaven Boyrazian does not own shares in Bioventix.

Ed Sheldon: Calnex Solutions

My top British small-cap stock for January is Calnex Solutions (LSE: CLX). It’s a leading provider of testing and measurement services to the telecommunications industry.

Calnex looks well placed to benefit from the global telecommunication industry’s upgrade to 5G technology. 5G is ultimately the key to many of the exciting new technologies we keep hearing about such as self-driving cars and remote surgery. Networks will need to be tested thoroughly in order for these kinds of technologies to go mainstream.

One risk to consider here is the ongoing semiconductor shortage. This could cause disruption. However, with the stock trading on a P/E ratio of less than 25, I think the risk/reward proposition is favourable.

Edward Sheldon owns shares in Calnex Solutions.

Roland Head: Finsbury Food

My small-cap pick for January is bakery firm Finsbury Food (LSE: FIF). This group supplies supermarkets and also sells under its own brands.

Finsbury has been going through a turnaround period, but now appears to be trading well. Earnings rose by 15% last year and brokers expect growth of 26% for the year ending 26 June.

Rising costs are a concern and supermarkets will always be tough customers. But I’m impressed by Finsbury’s recent performance. I think the stock still looks good value at under 10 times forecast earnings. I hold Finsbury shares and would buy more.

Roland Head owns shares of Finsbury Food.

Rupert Hargreaves: Michelmersh Brick Holdings

My top small-cap is Michelmersh Brick Holdings (LSE: MBH). The specialist brick manufacturer looks set to report a bumper year of growth for 2021, which could underpin further development in the year ahead.

The firm has no debt and a cash-rich balance sheet, suggesting that it has the financial headroom to support its growth ambitions this year. There is also room for shareholder returns. Michelmersh currently supports a dividend yield of 2.5%.

Inflation and competition are the two primary risks the business will have to overcome going forward. Despite these challenges, I would buy this small-cap stock today.

Rupert Hargreaves does not own shares in Michelmersh Brick Holdings.

G A Chester: B.P. Marsh & Partners 

B.P. Marsh (LSE: BPM) is a specialist investor in unquoted, early-stage financial services businesses that are in need of growth capital. 

Marsh looks for strong management and business plans. It takes a minority equity stake (typically 20%-40%), and aims to be a supportive, long-term partner. It works with management to grow the business’s value, ultimately towards a profitable exit via a public flotation, trade sale or other route. 

It has a long history of delivering value for shareholders through net-asset-value (NAV) appreciation and dividends. The shares are currently trading at a 20%+ discount, and I’m expecting a further NAV uplift in an early-February trading update. 

G A Chester has no position in B.P. Marsh & Partners.

Niki Jerath: Zephyr Energy 

For January, I’m looking at Zephyr Energy (LSE:ZPHR). This has oil and gas interests in Utah, Colorado and North Dakota.  

As oil and gas prices increased during 2021, its shares surged by over 600%. Although year-to-date, the stock is down around 2% due to worries about the Omicron variant. 

That said, its Paradox Basin project, in Utah, shows a lot of promise for 2022 and it has a pending deal in North Dakota, which was delayed last year. 

I could be wrong, but if the transaction goes ahead, I expect the share price to see a jump. 

Niki Jerath does not own shares in Zephyr Energy

Royston Wild: Card Factory 

I think Card Factory (LSE: CARD) is a small-cap stock whose eye-catching all-round value merits serious attention. The card and greetings retailer trades on a forward P/E ratio of below 6 times. It sports a mammoth 6.1% dividend yield as well. 

I like Card Factory for a number of reasons. Its strategy of selling products at low prices puts it in good shape to ride the value retail revolution. Recent investments in digital will allow it to make money during the e-commerce boom. I also like Card Factory’s focus on a more-defensive part of the retail market. We don’t stop celebrating birthdays, Christmas and other special occasions when times get tough, right? 

Royston Wild does not own shares in Card Factory.

Paul Summers: Cake Box Holdings

At 25 times earnings, shares in Cake Box Holdings (LSE: CBOX) certainly aren’t cheap. That said, the company’s fundamentals help justify this valuation. Returns on capital and operating margins are consistently high and there’s net cash on the balance sheet. CEO Sukh Chamdal also owns almost 25% of the company, which should mean that his interests are aligned with those of other investors.

Having already climbed 70% in the last year, share price growth may moderate in 2021. However, this looks like the sort of quality minnow I’d be comfortable holding a stake in for years rather than months.

Paul Summers has no position in Cake Box Holdings

Andy Ross: Property Franchise Group 

Shares in Property Franchise Group (LSE: TPFG) bring together an attractive combination of growth and income. Over three years the shares have gone from 120p to around 314p. Historic share price growth then has been good. The dividend yield is currently around 3%, but with decent levels of dividend cover, as well as earnings growth, I’m sure the dividend can keep growing.  

As a franchising operation, the business has high operating margins and returns on capital. For me, this makes Property Franchise Group a top British small-cap stock and I’ll likely be adding more, especially if the share price dips again.  

Andy Ross owns shares in Property Franchise Group.

I like to think I include myself in this group. And as luck would have it, the share price of one of my most coveted stocks is back down to levels not seen since the immediate aftermath of the March 2020 market crash.

Selling pressure

Set up in 2003, Farnham-based biotechnology firm Bioventix (LE: BVXP) specialises in the commercial supply of high-affinity monoclonal antibodies for applications in clinical diagnostics. In other words, these antibodies are used in blood testing machines in hospitals across the globe.

As a long-term hold, BVXP has been an absolute winner. As I type, the share price has climbed just under 1,000% in a little over eight years.

So far, however, this AIM-listed growth stock is having a poor 2021. The shares have retreated almost 24% year-to-date thanks to the brute that is Covid-19. With hospitals needing to prioritise treating the infected rather than diagnosing people for other things, it’s perhaps inevitable that profits have slipped. To compound the issue, fearful patients aren’t even reporting symptoms to doctors. 

So, the shares are cheap?

Not exactly. In fact, I imagine a fair few growth-focused investors would balk at the asking price (26 times earnings). However, I think this could prove to be a great contrarian opportunity for me for a few reasons.

First, BVXP scores extremely well on quality metrics such as returns on capital employed (ROCE) and operating margins. The former is something that star investors like Warren Buffett and Terry Smith pay a lot of attention to. Over time, it’s a company’s ability to reinvest the money it makes at a high level of return that separates the wheat from the chaff. 

Second, Bioventix is backed by some of what I consider to be the best fund managers in the business. No less than 20% of the company is held by star stock-picker Keith Ashworth-Lord in the CFP SDL UK Buffettology fund. Liontrust Investment Partners also owns a sizeable stake. Most importantly, Bioventix’s CEO Peter Harrison remains high up on the share register. Theoretically, the more willing management is to put its own cash at risk, the more likely it is to act in the interests of all shareholders.

Finally, there’s the balance sheet. With zero debt, Bioventix looks financially robust — the antithesis of many UK-listed companies right now. 

But what if Omicron sticks around?

It’s a fair question. The longer the pandemic goes on and resources are diverted elsewhere, the less near-term demand there is for Bioventix’s antibodies. Earnings could therefore continue to suffer in 2022.

Having said this, I do see Bioventix’s fall in 2021 as an opportunity to begin building a position at the very least. The shares could recover nicely if next year proves even slightly better than health and economic experts are currently predicting.

And if BVXP does stay down for longer than I expect it to, the dividend stream should make up for this. A potential 115p per share handout becomes a yield of 3.4% at the current share price.

As far as growth stocks go, I think there are a lot worse candidates out there.

Rupert Hargreaves: Trifast

Trifast (LSE: TRI) specialises in the design and manufacture of high-quality industrial fastenings. After a slowdown in demand last year, sales have rebounded this year. Revenues in the first half increased 30% compared to 2020 and are now ahead of 2019 levels.

As the global economy continues to rebuild after the pandemic, I think this trend could continue. Management is also looking to complement organic growth with acquisitions.

At the beginning of September, Trifast acquired Falcon in the USA, and management has said that the search for additional acquisitions continues “apace.”

Considering the growth potential, I would buy the stock for my portfolio. Some challenges it could face that may hold back growth include cost and wage inflation pressures.

Rupert Hargreaves does not own shares in Trifast.

Christopher Ruane: Card Factory

As people buy Christmas cards, small-cap stock Card Factory (LSE: CARD) is on my radar. It’s 56% higher than a year ago, but well below its Spring highs.

The company sharply cut its loss in the first half. The Christmas season should be busy. Increasing moves online could help grow sales. The company is cash generative and cut net debt by a third in the first half. But Card Factory remains risky. Its shops can see sales plummet if there are lockdowns, and supply chain inflation could hurt profits.

Christopher Ruane does not own shares in Card Factory.

Roland Head: Spectra Systems

I think that security technology specialist Spectra Systems (LSE: SPSY) could be a quality company at a reasonable price.

Spectra specialises in providing authentication technology for documents, consumer goods and currency. For example, Spectra provides the security features for many countries’ banknotes and the equipment needed to test them.

Banknotes are Spectra’s biggest market, and this is probably the main risk for investors. Use of paper money is falling and the business could struggle to grow.

However, Spectra is diversifying and continues to win new contracts. The group also upgraded its profit guidance for 2021 in October. I think the shares look reasonably priced at current levels. There’s also a tempting 4.7% dividend yield. This is a stock I’d buy today.

Roland Head does not own shares in Spectra Systems.

Andy Ross: finnCap  

Financial company finnCap (LSE: FCAP) is a great small-cap stock in my opinion. Apart from its small market capitalisation, which gives it plenty of headroom to grow into a much larger company, I really like finnCap’s financials. They indicate to me a stock that has serious growth potential. 

The group has a three-year compound annual growth rate (CAGR) for sales of 29%. This is important because, as an investor, I want to know that demand for a company’s products/services is continuously increasing. The operating margin is improving, so all in all it seems like potentially a great time to buy the shares.  

Andy Ross does not own shares in finnCap.

Royston Wild: Science in Sport 

I’d use recent price weakness at Science in Sport (LSE: SIS) as a dip-buying opportunity. The sports nutrition giant has fallen 10% in value over the past month. Demand for the products it makes is rocketing as peoples’ desire to live healthier lifestyles grows and fitness activities become more popular. Science in Sport’s revenues jumped 24% during the six months to June. 

This small cap’s more than doubled in value during the last year. If industry analysts are to be believed there should be plenty of opportunity for Science in Sport’s share price to continue soaring too. Experts at Statista for example think the global sports nutrition market will be worth $35.4bn by 2026. That’s up significantly from the $16.5bn it was valued at last year. Through its popular products I think the business should make big profits in this favourable landscape.  

Royston Wild does not own shares in Science in Sport.

Zaven Boyrazian: iomart

iomart (LSE:lOM) is a cloud-computing business trying to take on industry giants like Amazon, Alphabet, and Microsoft. That’s quite a tough bunch of competitors, so it’s not surprising to see revenue growth struggle. However, management has since begun pursuing a niche in the hybrid-cloud market through bolt-on acquisitions.

It will take some time before this new strategy starts yielding results. However, iomart continues to be supported by fairly impressive cashflows courtesy of its high customer retention and 93% recurring revenue.

There is obviously no guarantee of success. And using an acquisitive approach has led to an increased debt position that adds more risk. But given the potentially explosive returns of becoming a new leader in cloud computing, I think the risk is worth the reward.

Zaven Boyrazian does not own shares in iomart, Amazon, Alphabet or Microsoft.

Paul Summers: Bioventix

Although still far from being cheap, I think shares in biotech firm Bioventix (LSE: BVXP) are starting to look attractive. Stock in the small-cap antibodies supplier has fallen 20% in value in 2021 so far. 

At least some of this selling pressure has been due to hospitals continuing to prioritise dealing with the pandemic over diagnosing people for other things. To make matters worse, understandably cautious patients aren’t even reporting symptoms to healthcare professionals. As a result, Bioventix’s main business has been suffering.

I reckon this might be a great contrarian opportunity. BVXP’s returns on capital and margins are some of the best on the market. The balance sheet also looks sound. Any indication that Covid-19 is being beaten back and the shares could rally. 

Paul Summers has no position in Bioventix

Rupert Hargreaves: Braemar Shipping Services 

Braemar Shipping Services (LSE: BMS) is an international shipbroker and shipping services provider. Its exposure to seaborne trade suggests the company is highly leveraged to the global economic recovery. Indeed, analysts reckon group earnings per share will increase 40% this fiscal year. 

Based on these projections, the stock looks cheap trading at a forward price-to-earnings (P/E) multiple of 12.8. 

The company’s valuation and growth potential are the reasons why I’d buy Braemar as a recovery stock in July. 

That said, if the economic recovery fails to live up to expectations, Braemar may be one of the first to suffer. As such, this investment has quite a high level of risk. 

Rupert Hargreaves does not own shares in Braemar Shipping Services.

Edward Sheldon: Keystone Law

My top small-cap stock is Keystone Law (LSE: KEYS). It’s an innovative, platform-based law firm that’s disrupting the UK legal industry. Last year, it won ‘Law Firm of the Year’ at The Lawyer Awards.  

Keystone has generated strong revenue and profit growth in recent years and I expect it to continue doing so in the years ahead. In the short term, the company should benefit as the UK reopens and economic activity picks up. In the long run, the expansion of its platform should drive top- and bottom-line growth higher.

One thing to be aware of is that the stock’s valuation is quite high. This adds risk to the investment case. Overall, however, I think the risk/reward proposition here is attractive.

Edward Sheldon owns shares in Keystone Law

Harshil Patel: Cake Box Holdings 

Cake Box Holdings (LSE:CBOX) is a specialist retailer of fresh cream cakes. It’s a franchise business and delivers most of its growth by opening new stores.  

So it’s encouraging to see a strong pipeline of new locations. It currently has 157 franchised stores and another 18-24 are expected this year. It’s also trialing several kiosks with a national supermarket. 

At some point, locations could become saturated and an optimum number of stores will be reached. That said, there’s currently plenty of eligible franchise applicants and potential locations to keep Cake Box growing.  

Overall, Cake Box is a quality company led by entrepreneurial management. I like that it offers double-digit earnings growth and strong margins. Its balance sheet looks strong and even offers a well-covered dividend. 

Harshil Patel owns shares in Cake Box Holdings.

Tom Rodgers: SCS

With home refurbishment markets booming, sofa manufacturer SCS Group (LSE:SCS) is my top small-cap stock for July 2021. The £116m market cap firm has produced operating profit growth of 30.6% in the last 12 months as sales and profits surge post-lockdown. Dividends are expected to return in force, as high as 12p per share for 2022, offering substantial future income even after a 40% rise in the share price in the year to date. A forward P/E of 11 times earnings is cheap and I see more upside for July and beyond.

Tom has no position in SCS at time of writing.

G A Chester: B.P. Marsh & Partners 

Founded in 1990, and still founder-led, B.P. Marsh & Partners (LSE: BPM) is a specialist private equity investor in early stage financial services businesses. There’s higher risk with fledgling businesses, but the company has an impressive long-term record of growing its net asset value (NAV). It reported another year of growth last month, with NAV up £13m to £150m. 

The stock is currently priced with a market capitalisation around £120m. In other words, at a 20% discount to NAV. Given the company’s track record of delivering strong shareholder returns (including dividends), and the growth prospects of its investee businesses, I think there’s exceptional value on offer here. 

G A Chester has no position in B.P. Marsh & Partners.

Zaven Boyrazian: Bioventix 

Bioventix (LSE:BVXP) is a biotech company that manufactures specialised antibodies for blood testing. It’s a niche product. But remains an essential ingredient for diagnosing almost every type of disease – including Covid-19.

The firm generates revenue from direct sales to in-vitro diagnostic companies and royalties from any product developed using its propriety material. The latter has yet to evolve into a substantial source of income. But it does provide the facility for a recurring revenue stream in the future.

Bioventix operates in a highly regulated industry. This undoubtedly adds some operational risks. Suppose the firm or any of its royalty-generating customers fail to comply with regulations. In that case, its reputation and income could be compromised. But personally, I think the potential reward is worth the risk.

Zaven Boyrazian does not own shares in Bioventix.

Roland Head: Vertu Motors

Car dealership group Vertu Motors (LSE: VTU) is one of the UK’s largest motor retailers, with brands including Bristol Street Motors. Vertu says that demand for used cars is “exceptional” at the moment. The latest update from the company revealed strong trading and triggered an upgrade to profit forecasts.

The main risk flagged by the company is that the global chip shortage will cause delays to new car deliveries. However, Vertu’s share price is covered by the value of the group’s property portfolio, and the business currently trades on just seven times forecast earnings. Brokers are also forecasting a useful 3.6% dividend yield this year.

In my view, Vertu looks like a good, cheap, small-cap stock. I recently added the shares to my portfolio.

Roland Head owns shares of Vertu Motors.

Paul Summers: SDI Group

Having multi-bagged over the last year, shares in shares in scientific product maker SDI Group (LSE: SCI) look expensive. However, I suspect they could eventually be worth a lot more thanks to an acquisition-focused growth strategy similar to that of FTSE 100 top stock Halma.

There could even be more upside in July. The company stated in May that it would exceed previous estimates on FY21 revenue and adjusted pre-tax profit (given in February). I wonder if trading since then, combined with the lifting of restrictions, will lead management to also upgrade its FY22 guidance later this month.

Paul Summers has no position in SDI Group or Halma.

Christopher Ruane: M&C Saatchi

Things have been looking up for the previously troubled advertising small-cap stock M&C Saatchi (LSE: SAA).

The shares are up 156% already over the past year. For a company whose survival was in question at one point, that is impressive. But I see further possible gains ahead. The advertising market generally is buoyant. M&C Saatchi is poised to benefit from that. The company recently lifted its forecast for the year.

The company’s reputation remains tarnished, though, which could act as a dampener on growth.

Christopher Ruane does not own shares in M&C Saatchi.

Royston Wild: Begbies Traynor 

The British government’s furlough schemes have helped keep a lid on insolvency rates during the pandemic. But with these financial support programmes set to end, I think now could be a good time to invest in Begbies Traynor Group (LSE: BEG). 

Indeed, buying this UK share before full-year results are released on Tuesday 20 July could be a very good idea. Despite a depressed insolvency market Begbies Traynor said in May that full-year revenues would grow ahead of market expectations following a strong fourth-quarter performance. News that trading has remained robust in the new financial period (to April 2022) could help lift the small cap again following recent share price weakness.

At current prices Begbies Traynor trades on a rock-bottom forward price-to-earnings (PEG) ratio of 0.4. This provides plenty of scope for a fresh move higher.

Royston Wild does not own shares in Begbies Traynor. 

This new approach to developing medicines from living organisms rather than chemical bases has allowed the pharmaceutical industry to make giant leaps. But its uses are not limited to just medicine. Biotechnology companies have developed pest-resistant crops, biofuels for vehicles, and even gene cloning.

This diverse range of applications and continual discoveries have created an enormous opportunity for these two biotech companies, in an industry expected to reach $500bn by 2026.

Oxford Biomedica – A hidden industry leader?

Oxford Biomedica (LSE:OXB) specialises in gene and cell therapy. This segment of the biotechnology sector is relatively new, with only eight FDA-approved treatments on the market today. However, by 2025 it’s expected that 10-20 new therapies will be approved — every year.

Why do I think Oxford Biomedica is a leader? It’s simple. Developing gene and cell therapies is a costly process that most pharmaceutical companies would deem too risky to pursue. However, this stock has developed a proprietary platform called LentiVector.

It allows Oxford Biomedica to utilise its expertise to assist large pharma companies in developing new drugs. The firm charges bioprocessing and development fees for clients using the platform. This approach to drug development is considerably cheaper for clients and subsequently reduces the investment risk.

Attracting the likes of Novartis and Bristol Myers Squibb, the platform has become a centre point for bio-drug development. What’s more, is even after completion and approval of a new treatment, Oxford Biomedica continue to receive royalties from each sale. Needless to say, this business model creates an incredible stream of recurring revenue and cash flow – a key requirement for explosive returns.

Bioventix – An industry diagnostics expert

Bioventix (LSE:BVXP) operates in a different segment of the industry. It designs and manufactures specialised antibodies for blood testing machines. Today blood tests are used to diagnose almost every disease — including Covid-19.

This continual rise in demand has drastically increased the price of antibodies. To put it in perspective, Bioventix currently sells between 10-20 grams each year at around £4m.

Currently, the supply does not meet the demand, and while this won’t be the case forever, it may not matter over the long term.

Just like Oxford Biomedica, Bioventix works directly with large pharma companies to sell or develop new antibody solutions. The firm also continues to receive royalties on each subsequent sale of a product designed with its antibodies. Almost 70% of the revenue stream originates from these multi-year royalty payments.

Growth stocks with a recipe for explosive returns?

With one business diagnosing the problems, and the other finding treatments, they capture a large portion of the industry pipeline. Combined, the companies amount to a $1.12bn market cap, thus there is a lot of room for growth.

I’ve owned shares in Oxford Biomedica for many years, and recently I’ve bought more. Bioventix is a far smaller company, but it’s looking ever-more promising in my eyes. Fused in one portfolio, I believe these biotech growth stocks have the potential to create explosive returns for myself and other shareholders.

The opportunity 

Bioventix (LSE:BVXP) is a biotechnology company that specialises in manufacturing antibodies for blood testing machines. Hospitals around the world use its products to help diagnose heart disease, thyroid problems, fertility issues, cancer, and a plethora of infectious diseases.

Unlike other antibody creation labs, Bioventix uses a proprietary sheep monoclonal antibody (SMA) technology that far out-performs the competition.

The business has two revenue streams.

The first is the manufacture and distribution of its SMAs to in vitro diagnostics (IVD) companies around the world – such as Roche Diagnostics, Siemens Healthineers, and Abbott Diagnostics.

Currently, the company sells around 10–20 grams of the purified antibodies each year. Needless to say, it’s an expensive material.

The second source of revenue is from royalties. Whenever a client sells a diagnostic product that uses SMAs to their downstream customers, Bioventix receives a modest royalty. As it stands, these agreements generate approximately 70% of the company’s annual revenue.

This unique approach to business results in an ongoing source of money from its clients, after the sale of the product.

It also partakes in contract antibody creation programmes. Other companies pay Bioventix to develop a new antibody for exclusive use. The process typically takes one year. Once completed, the firm once again continues to receive royalties from each sale.

The financials 

The latest results from June 2020 revealed continued revenue growth of 11%. At first glance, this appears to be a slow-down from previous years. However, Covid-19 did cause disruptions to the routine of the global IVD market that resulted in a 15%–20% reduction in activity.

A diverse portfolio of antibodies drives the royalty revenue. Although, it is worth noting that the royalty agreement for NT-proBNP, which currently represents 13% of annual revenue, is set to expire in July 2021.

There are plenty of other products generating royalties ready to replace it. However, the loss of income may have a notable impact on 2022 annual revenue.

One of the best shares to buy now?

The highly regulated pharmaceutical industry is both a blessing and a curse. Regulators have already approved the SMAs, but not the products of its clients. Seeking approval is a very lengthy process that can take up to a decade of tests and trials.

This delays the royalties Bioventix is set to receive from its contract antibody creation programmes. To put this into perspective, the projects being developed today likely won’t yield royalty revenue until 2025–2035.

On the plus side, the long and expensive path to approval grants a significant competitive advantage. The process creates a large barrier to entry for competitors as they would have to pursue regulatory approval themselves. 

In my opinion, this form of competitive edge is a rare to come by. Whether they are the best shares to buy now is a personal decision, but Bioventix is definitely on my list as a possible addition to my portfolio.

A less risky AIM stock

Bioventix (LSE: BVXP) is the first AIM stock that I particularly like. The biotechnology company is involved in the development and supply of antibodies. It has seen tremendous growth over the past few years, with earnings increasing from £1.6m in 2014 to £6.5m last year. Recent interim results saw pre-tax profits rise 31% over the six months to the end of December 2019.

The firm also pays a strong and healthy dividend. Thanks to a highly cash-generative model, it currently yields over 2%, and has been consistently growing. In fact, the interim dividend was recently raised by 20%, despite the poor economic climate. As such, I can see Bioventix become one of the big dividend payers of the future.

My only issue with this AIM stock is its pricy valuation. Although its price-to-earnings ratio of 32 is not overly expensive in comparison to other biotechnology companies, a price-to-book ratio of 22 is significantly higher than the market average of 1.3. Even so, quality stocks such as these are going to be more expensive. With no debt, an ever-growing dividend, and profit margins of nearly 70%, I believe it’s worth every penny.

A market leader in US healthcare

Craneware (LSE: CRW) provides software to US hospitals to help them manage patient billing and costs. There are many reasons why I like this AIM stock. Firstly, it has an extremely robust balance sheet. This includes no debt, cash reserves of nearly $50m and undrawn debt facilities of $50m. As a result, the company should be able to capitalise on any market opportunities that arise. I also like the fact that the CEO and founder of the company, Keith Neilson, is also the second-largest shareholder. This demonstrates strong commitment to the firm, and management is evidently experienced.

Once again, there are problems to underline. For example, the share price was punished in 2019 when growth temporarily stalled. As a result, Craneware shares are trading at a discount of over 50% from the all-time high. But with a large number of recurring revenues, and limited impacts from the pandemic, it looks set to gain back these losses in the coming years.

All in all, I’d buy both these AIM stocks. While the AIM market can often be risky and unpredictable, both these stocks seem safer options. With both paying decent dividends already, they could also become the income stocks of the future.

By sharp contrast, the valuations of some UK companies have bounced to such an extent that March appears as a mere blip on their respective charts. 

Here are three examples that caught my eye.

Pets at Home

Due to “exceptional levels of demand” from pet owners over the last few weeks, retailer Pets at Home (LSE: PETS) has outperformed. Underlying pre-tax profit for the full year is expected to come in “slightly above the top end of the range of current market expectations.” As such, it’s probably no surprise its share price has galloped back to where it was only a few weeks ago. 

Can this positive momentum continue? It’s a tricky one. Having already closed its grooming salons, Pets now expects lower revenue from its vet practices and stores as people only make a trip if absolutely necessary.

Given the company has reported customers “pulling forward purchases,” you have to consider the possibility many owners have already stockpiled enough food for their furry friends should the lockdown be extended.

With no guidance for the next financial year issued, it’s understandable if prospective investors are still reluctant to buy. Nevertheless, the defensive nature of its industry surely makes Pets a far safer bet than other stocks in the FTSE 250. 

CMC Markets

Online trading provider CMC Markets (LSE: CMCX) is another firm that’s seen its share price recover. Actually, that’s something of an understatement. It’s now higher than before the coronavirus pandemic struck. 

This all feels very logical, given CMC benefits from periods of market volatility. Indeed, recent numbers suggest business is booming. More clients are signing up to use its platform (or logging back in). So the small-cap now expects full-year trading revenue from its main CFD business to be around £214m. This is almost double what it generated in FY19.

Markets are likely to remain jittery for the foreseeable future. But I think those buying now could still make decent gains. Having said it would retain its policy of paying out 50% of post-tax profit to its shareholders, CMC looks a relatively safe bet for income investors too.

Bioventix

Last, but not least, we have antibody developer and supplier Bioventix (LSE: BVXP). While unrelated to the current crisis, last week’s set of interim results helped explain why its share price has now returned to levels seen in February. 

Revenue and pre-tax profit jumped 21% and 31% respectively over the six months to the end of December. In addition to this, Bioventix saw fit to raise its interim dividend by a cracking 20%, to 36p per share.

The near-term outlook was also reassuring. A reduction in some diagnostic testing might impact earnings. But Bioventix expects to continue supplying antibodies to customers in countries affected by Covid-19. This makes sense given that healthcare services have now been prioritised.

The only slight concern for me is the company’s small workforce (16 people). This could become stretched if government guidelines on how companies should operate are modified.