Riding the streaming boom

The vast amount of choice that TV viewers have today has sparked an arms race among the streaming giants. The likes of Netflix, Disney, and Amazon are spending eye-popping amounts on content to attract our attention. WarnerMedia and Discovery plan to raise the bar even further, too: they plan to spend $20bn on programming for their Discovery+ and HBO Max platforms when their merger completes later this year.

All of this bodes well for Zoo Digital Group (LSE: ZOO). This almost penny stock provides a range of production services for broadcasters, movie studios, and streaming companies. These include subtitling and dubbing programming, fine-tuning scripts, and optimising content for local audiences.

Last month Zoo Digital raised its revenue growth forecasts for the current financial year (ending March 2022) to 44%. The tech firm said that its strong order pipeline continues to grow, too, giving it robust profits visibility beyond the medium term. And it said that its appointment as primary vendor for the European launch of a global streaming service “will lead to significant orders commencing in quarter four and delivering meaningful revenues in financial 2023”.

Terrific value for money

Zoo Digital’s earnings outlook looks pretty sunny, then. And this is reflected in current City forecasts. Analysts think the business will bounce back into profit this year following the initial stresses caused by Covid-19. They reckon earnings will jump 141% in the upcoming financial year beginning in April. An extra 52% is forecast for financial 2024 as well. Like all forecasts, these could change based on future developments.

I believe these estimates could make Zoo Digital too cheap for me to miss. They mean that, at current prices of 125p per share, the company trades on a forward price-to-earnings growth (PEG) ratio of 0.5. Conventional investing theory says that a reading below one means a stock could be undervalued by the market.

Another nearly penny stock I’m considering buying

Oxford Metrics (LSE: OMG) is one more almost penny stock on my watchlist today. This UK tech share doesn’t offer the same sort of value as Zoo Digital. But at 105p per share it still trades on a quite reasonable forward PEG ratio of 1.

I like Oxford Metrics because demand for its motion tracking technology is robust. It is used to produce special effects in movies, helping highways authorities monitor traffic flows, and assisting clinicians with administering healthcare. The range of applications for the tech is steadily rising.

It’s why City brokers think earnings at Oxford Metrics will rise 37% in this financial year ending September 2022. They’re tipping profits to increase by 16% next year as well.

Of course Oxford Metrics and Zoo Digital aren’t without risk. The former, for example, needs to invest colossal sums in its products to remain competitive, something that can be a drag on profits growth. Meanwhile Zoo Digital could suffer if demand for streaming services begins to fall. But at current prices I believe these two cheap UK shares are still top buys for my portfolio right now.

Demand for renewable energy stocks like this is shooting higher as the concept of ‘responsible investing’ takes off. It’s a phenomenon I think could underpin strong share price growth as concerns over the climate emergency steadily grow.

TEEC splashes the cash on low-carbon energy projects across the UK. Its most famous investment is perhaps the acquisition of combined heat and power (CHP+) assets on the Isle of Wight. But it’s steadily building its footprint in the field of hydroelectric power too and late last month spent £26.6m to snap up a cluster of water-based power projects in Scotland.

The UK government has put ‘green’ energy at the heart of its industrial strategy for the next decade. And TEEC could be well-placed to capitalise on such political will. However, it’s worth remembering that a changing of the guard in Westminster could have serious ramifications for shares such as this.

A cybersecurity star

Cybercrime is an increasingly-large problem for individuals and companies all over the globe. As a consequence spending to prevent online attacks is going through the roof. Analysts at Researchandmarkets.com think the global security industry will be worth a staggering $539.8bn by 2030. That compares with the $183.3bn it was estimated at last year.

NCC Group (LSE: NCC) is a cheap UK share I’d buy to make money from this booming sector. It’s been no stranger to profits upgrades in recent months. And in early November it described trading since the beginning of October as “solid”.

News that its acquisition of Iron Mountain’s Intellectual Property Management (IPM) business in June is progressing well could help NCCs share price recover after recent heavy weakness. At 231p per share, NCC has basically lost all the gains it accrued during the past 12 months. However, signs of problems with integrating its new unit could conversely see the software business extend its slide.

Virtually brilliant

I invested in Keywords Studios — a provider of software development services — last year to capitalise on the booming video games market. I think motion capture specialist Oxford Metrics (LSE: OMC) could be another way to effectively ride this train. Trading at its Vicon division is extremely strong, thanks to what it describes as a “buoyant” games sector, and in particular the adoption of Virtual Production by various large production studios.

Virtual Production allows developers to go about their business in both the real and digital worlds. It’s complicated and clever stuff, but all I need to know from an investment perspective is that it’s also lucrative business.

Revenues at Oxford Metrics soared almost 18% in the year to September, to £35.6m. I’d buy this cheap UK share despite the threat posed by the high levels of competition in the tech sector it operates in.

Today, the share price is around 89p. But, in fairness, the stock shot up to more than 125p in February immediately before the coronavirus crisis hit the markets.

Why Oxford Metrics is a share I’d buy now

I thought the business looked good in June 2019 and I still like the look of it today. However, Covid-19 has affected operations a bit as we can see in today’s results report covering the 12 months to 30 September.

Revenue slipped back by just over 14% compared to the prior year and earnings per share plunged by a little over 48%. However, the company managed to increase its net cash position by almost 8% to nearly £15m. That suggests a decent cash inflow performance in the period. And one of the things I like is the company carries no debt, apart from a few lease liabilities. Meanwhile, the directors held the ordinary dividend flat, so at least there wasn’t a cut for shareholders.

The company provides software for infrastructure asset management and motion measurement.  Highways authorities use the product to manage their road networks. Hospitals and clinicians use the software to decide on therapeutic strategies. And Hollywood studios create “stunning” visual effects using Oxford Metric’s solutions. On top of that, the company reckons applications for the firm’s output are “growing all the time.”

And we can see evidence of the firm’s progress and expansion in the financial and trading record. Revenue and the shareholder dividend have been on a clear uptrend over the past five years. And City analysts following the firm have pencilled in robust double-digit percentage increases for earnings and the dividend in the current trading year to September 2021.

Growth ahead

The company serves clients in more than over 70 countries and chief executive Nick Bolton said in today’s report trading started well in the current trading year. Looking ahead, he thinks the firm’s strong balance sheet and “a tailwind from structural growth drivers” puts the business in a strong position to realise its expansion plans.

Meanwhile, with the share price at 89p, the forward-looking earnings multiple for the current year is just above 16 and the anticipated dividend yield is 2.8%. I’d buy a few of the shares with a holding period of at least five years in mind, and probably much longer than that.

But Oxford Metrics isn’t the only smaller company I’m keen on right now. When it comes to positioning my portfolio for the next bull run in 2021 and beyond I’d also consider technology tools and systems provider Oxford Instruments.

And I like the turnaround and growth stories unfolding in fast-moving consumer goods companies Premier Foods and mid-cap PZ Cussons. But I’m also considering making a broad-brush investment in smaller companies by buying a collective fund such the iShares MSCI UK Small Cap UCITS ETF.

Tom Rodgers: Sylvania Platinum

Sylvania Platinum (LSE: SLP) is one of those stocks I think will become increasingly strategically important. The platinum group metals the company processes at a low cost from its base in South Africa are used in practically every modern electrical appliance. Prices for rhodium and palladium have rocketed to near all time highs this year as demand outstrips supply.

With $55m cash and no debt, profits and earnings per share both doubling from 2019 to 2020, and investors in line for a special windfall dividend in 2021, this is one of the most obvious micro-cap no-brainers I’ve seen for years. 

Tom Rodgers owns shares in Sylvania Platinum.

Zaven Boyrazian: Tristel

Throughout 2020, medical centres around the world have adopted far more rigorous cleaning standards. In light of recent news, a Covid-19 vaccine may soon be ready.

However, even after this pandemic comes to an end, the increased disinfecting practises are likely to continue with stricter legislation. This creates a vast opportunity for Tristel (LSE:TSTL).

The firm manufactures infection prevention products that are widely used throughout hospitals. Given each of their products are consumables, they create a recurring income from existing customers.

As all products require FDA approval, Tristel faces little competition within a rapidly expanding market space.

Zaven Boyrazian does not own shares in Tristel.

Kirsteen Mackay: Tracsis

Tracsis (LSE:TRCS) is a UK tech stock that makes software specifically designed for the transportation industry, with railways being a main beneficiary. The company has been publicly listed for 13 years and its share price has risen approximately 1,075% during this time.

With the pandemic pausing travel, this has caused a sharp shock to the company, but it’s still winning government contracts. Although the Tracsis share price has seen extreme volatility this year, I think it will renew its growth trajectory once normality resumes. It has a £150m market cap. Its price-to-earnings ratio is 28 and earnings per share are 17p. 

Kirsteen does not own shares in Tracsis.

Edward Sheldon: Cerillion

My top micro-cap stock for November is Cerillion (LSE:CER). It’s a leading provider of cloud-based (SaaS) billing, charging, and customer management systems.

Cerillion appears to have plenty of momentum at the moment. In October, the group advised that trading in the second half of the year ended 30 September was strong. During this period, the company signed its largest-ever contract. Meanwhile, it said that its back-order book was at record highs and that it expects revenue and adjusted EBITDA for the year to be ahead of current market expectations.

At the time of writing, Cerillion has a market cap of under £100m, meaning there’s plenty of potential for growth. All things considered, I think this micro-cap stock looks pretty exciting.

Edward Sheldon has no position in Cerillion.

Rupert Hargreaves: Inspecs

I have my eye on UK-based designer, manufacturer and distributor of eyewear frames, Inspecs (LSE: SPEC).

The UK eyewear market is vast, and it’s only expected to continue to expand over the next few decades. This growth is projected to show through in Inspecs’ top line next year. Sales set to jump by a third in the next two years.

A cash-rich balance sheet could also hint at the prospect of large dividends from this consumer-focused business.

In my opinion, as Inspecs’ sales expand over the next few years, the stock has the potential to jump higher.

Rupert Hargreaves does not own shares in Inspecs.

Royston Wild: Bloomsbury Publishing

Bloomsbury Publishing is a share I’d buy today and hold for all time. It’s not just the eternal appeal of the Harry Potter franchise which makes this UK share a great long-term buy. I’m also encouraged by the huge profits potential of its move into academic publishing.

Bloomsbury’s shares recently soared to their most expensive since February on some blowout trading numbers. First-half earnings clocked in at twelve-year highs as sales of the publisher’s online books and e-books rocketed. The performance of its digital academic products was also impressive as institutions switched to remote learning due to the pandemic. As a consequence sales of these particular products surged by almost half year on year.

With organic sales rocketing, and its cash-packed balance sheet also creating chances for more profits-boosting acquisitions, I reckon Bloomsbury is a terrific buy right now.

Royston Wild does not own shares in Bloomsbury Publishing.

Kevin Godbold: MPAC

Global packaging company MPAC (LSE: MPA) aims to become a market leader in the “pharmaceutical, healthcare, food and beverage sectors.”

I think MPAC’s niche in those defensive sectors looks attractive. The business is bouncing back from the first wave of Covid-19 lockdowns. And in September the directors announced an acquisition in the US, followed in October by the relaunch of the MPAC brand along with a new corporate website.

City analysts expect earnings to resurge more than 50% in 2021. And with the stock near 400p, the forward-looking earnings multiple is just below 11. With growth on the agenda, I’d buy the micro-cap stock for November and beyond.

Kevin Godbold does not own shares in MPAC.

Jonathan Smith: Oxford Metrics

Oxford Metrics (LSE: OMG) is a UK based software and data analytics company, with offices worldwide. It has an asset management software arm called Yotta, that has been performing very well in recent times. I feel the business is well set to perform well even during an extended pandemic situation. The firm has no debt, and cash balances of over £14m as of Q2 2020. 

The nature of the business also means strong ‘annualised recurring revenue’, that was up 14.6% versus last year. This should aid continued growth in the future. The share price has doubled in value over the past 5 years.

Jonathan Smith does not own shares in Oxford Metrics.

Roland Head: Brickability

Recent results suggest the housebuilding market is enjoying a rapid recovery from the COVID-19 slump. One company I think could benefit from this strong demand is Brickability (LSE: BRCK).

This £115m firm sells bricks, roofing, and other building materials to housebuilders. Growth areas include heating, plumbing and doors. Chairman John Richards says that the company is seeing a “V shaped” recovery and the firm has just issued a solid set of half-year results.

The shares trade on just seven times 2021 forecast earnings and offer a well-covered 5% yield. I’d be happy to buy at these levels.

Roland Head does not own shares in Brickability.

Paul Summers: Churchill China

With things looking positive on the coronavirus vaccine front, my pick of the micro-cap stocks this month is ceramic tableware supplier Churchill China (LSE: CHH). 

Naturally, the £140m cap has seen its revenue, profits, and share price walloped by the virtual shutdown of the hospitality sector in 2020. However, I think the potential rewards now outweigh the risks.

While a full recovery won’t be immediate, earnings are expected to bounce back in 2021 as pubs, restaurants and hotels reopen. In the meantime, this high-quality, ‘family-owned’ company has cut costs where it can and remains debt-free.

Paul Summers owns shares in Churchill China.

Matthew Dumigan: Tatton Asset Management

Since flotation in 2017, shares in Tatton Asset Management (LSE: TAT) have been rather volatile. However, over the three years, the company’s share price has risen 45%, delivering a tidy return to investors. 

The company provides a range of on-platform only services ranging from discretionary fund management and compliance to mortgage provision. What’s more, the firm’s recent half-year results report was positive, with group revenue increasing by 12.6% year-on-year and adjusted operating profit rising by 21.9%.  

Ultimately, I’m impressed by the company’s earnings growth and I reckon Tatton can continue to deliver a strong performance in the years to come.  

Matthew Dumigan does not own shares in Tatton Asset Management.

G A Chester: Trans-Siberian Gold 

Trans-Siberian Gold (LSE: TSG) is a small but profitable miner with ambitions of becoming a premier mid-tier operator. Its strategy is to maintain a strong balance sheet, while both investing in growth opportunities and paying a base level of sustainable dividends through the commodities cycle. 

The base level’s set at around $3m a year (a 2.5% yield at the current share price), but the company regularly distributes more. This year’s interim dividend alone was $7m (5.9% yield). 

With its growth prospects and record of distributing surplus cash to shareholders, Trans-Siberian Gold is my top pick in the smaller companies space. 

G A Chester has no position in Trans-Siberian Gold.

James J. McCombie: Surface Transforms

Surface Transforms (LSE: SCE) recently won a contract worth £27.5m to supply an eighth global automotive customer with its high-performance carbon-ceramic brake discs. As a result, revenues should quadruple to £8m in 2022 versus 2020, and earnings per share should turn positive.

The high-performance brake market is worth £200m and growing, but a single supplier is dominant. Surface is now a credible alternative for manufacturers looking to diversify, and I think it will increase its market share significantly. 

Since electric vehicles need brake discs, Surface also looks good for the long-term, and I think it’s a great micro-cap stock pick.

James J. McCombie owns shares in Surface Transforms.

Of course, there are no guarantees when it comes to investing. Here, however, are three minnows that I suspect will have rewarded investors by the time they’re ready to swap the office for the beach.

Future ISA star

As I predicted almost two months ago, online instrument supplier Gear4music (LSE: G4M) released some cracking numbers this week. The business has benefitted hugely from the lockdown with more people than ever learning and practicing music to pass the time. 

Naturally, the share price has reacted positively to news that profits have exceeded management expectations. Whether this momentum will remain near-term is hard to say. The lifting of restrictions could mean earnings have peaked for a while. 

On the other hand, the likelihood that many independent retailers on the UK’s high street will find the going tough could play into the £90m-cap’s hands. Indeed, CEO Andrew Wass has said Gear4music is “confident of continued financial improvements during FY21.“

Regardless of what happens in the rest of 2020, I remain confident this stock could prove a real winner for long-term investors.

Move fast

Another small-cap stock that could reward patient ISA investors is software company Oxford Metrics (LSE: OMG).

Already operating in over 70 countries, Oxford assists firms in measuring and capturing motion. It does this via its infrastructure management-focused Yotta division or movement analysis Vicon business.

What I particularly like about this company is the diversity of its clients. These range from highways authorities needing help to manage road networks to film studios wanting support in creating visual effects. 

Perhaps unsurprisingly, Oxford’s share price hasn’t really recovered from March’s sell-off. It’s still 33% below the all-time high hit back in February.

While recent trading is unlikely to be good, I sense now might be an opportunity for ISA holders to acquire a slice of the business whose fundamentals have been steadily improving. The balance sheet also shows no signs of distress, boasting net cash of almost £11m.

Expensive…but worth it

Last on my list of small-cap opportunities is US-focused software firm Craneware (LSE: CRW). Its tech is designed to highlight operational and financial risks to hospital managers and how they can make things more efficient.

The thing to realise about Craneware is that its valuation has always been high. Despite the recent market crash, shares still trade on a forecast price-to-earnings (P/E) ratio of 31 for FY 21 (beginning in July).

Before dismissing the company, however, it’s worth mentioning that the five-year average P/E is 36. Moreover, Craneware has consistently shown why it deserves its premium rating. Margins and returns on capital are seriously high. It also dominates its niche and carries very little debt. This all piques my interest, even if the adoption of its new analytics platform is taking longer than expected. 

Craneware’s share price could remain under pressure if we get a second Covid wave/market crash. However, I’m having trouble finding reasons to see why it won’t reward ISA investors over the long term.

The firm delivered its half-year results this morning and, as I write, the stock is heading towards being 10% down on the news.

Great figures

Before even looking at the results, I reckon it’s fair enough that the share is being marked down just for being another with ‘Oxford’ in its name. How are we poor investors, and all the potential customers, supposed to tell one company from another? What some of these outfits need more than anything else is a lesson in branding, in my view.

There’s more leverage to be had than by simply naming an enterprise after the place it was started – especially when so many businesses come from a big city such as Oxford! Richard Branson, for example, found his inspiration from other sources when naming his companies, and things worked out well for him.

Yet despite today’s plunge in the shares, the figures are rather good. In the six months to 31 March, revenue rose almost 13% compared to the equivalent period a year earlier, and earnings per share shot up just over 48%. The success translated into a rising cash balance, with net cash lifting almost 19% to a smidgeon below £11m. I think a building cash balance is undeniable evidence that an enterprise is succeeding.

A positive outlook

Chief executive Nick Bolton said in the report the positive start to the year was driven by the company’s Vicon division, which secured deals with NASA’s Jet Propulsion Lab and Square Enix. He reckons the outcome helps to consolidate the firm’s position of leadership in the engineering and entertainment markets. 

On top of that, Bolton revealed that the location-based virtual reality market is “really beginning to take off” this year. He reckons the scale of that market “is significant.” The firm’s partners are launching new locations “across multiple geographies,” he says, and the company signed an“exciting” new partnership agreement in the period with Sandbox VR.

Looking forward to the second half of the year, Bolton said the pipeline of sales for the Yotta division and Vicon “is strong,” which underpins his confidence the firm will perform“in line with market expectations for the full year.” City analysts following the firm have got estimates pencilled in for a percentage increase in earnings in the mid-to-high teens. For the following trading year to September 2020, the estimates I’ve seen are north of 30%, so expectations are high.

A fair valuation?

Indeed, Oxford Metrics is trading and expanding well and it operates in a profitable sector that I’m keen on. So why the weakness in the shares today? I think it is because high expectations lead to a high valuation, and any slight undershoot of some investors’ expectations could cause some of the froth to fly off the valuation.

However, today’s share price close to 90p throws up a forward-looking earnings multiple close to 18. Given the vibrancy of the enterprise, I think that’s fair and see the stock as ‘attractive’.

Unfortunately this doesn’t guarantee that they will be profitable for shareholders. This is why I’d only buy one of these stocks today.

Within sight of success?

Australian firm Seeing Machines (LSE: SEE) built its reputation by developing driver monitoring systems for giant mining trucks. These systems were successful at detecting drowsy drivers and reducing crashes due to fatigue, but the mining market is relatively small and specialised.

The company needed a large-scale move into the on-road truck fleet market to achieve profitable scale, and this is taking time. One of the problems facing the firm is that the costs of developing its technology appear to be quite high.

Today’s interim results provide a taste of the problem. Although revenue for the six months to 31 December rose by 267% to A$14.7m, the group’s operating costs rose by 55% to A$23m. As a result, losses for the period increased from $14.1m to A$16.7m.

The picture isn’t clear to me

In fairness, some of this increased loss was the result of an inventory build-up of its Guardian fleet product ahead of deliveries during the early part of 2018. Seeing Machines does expect a stronger financial performance during the second half of the year.

But the firm has confirmed that its full-year performance is expected to be in line with market expectations, which are for a loss of A$29.7m.

Why I’d sell

This stock has risen by about 65% since October, when management issued a bullish statement suggesting sales could rise from A$13.6m in 2016/17 to about $80m in 2018/19. Strong fleet and automotive revenues are expected to drive this growth.

On the strength of this, the firm raised £35m (A$62m) in a share placing in December. The group is now well funded, but there’s no guarantee it will have enough cash to reach profitability.

Indeed, it’s not clear to me when Seeing Machines will become profitable. That’s why I’d use the current price strength as an opportunity to sell.

Profitable analytics

One high-tech stock I am keen on is Oxford Metrics (LSE: OMG). This software group makes “analytics software for motion measurement and infrastructure asset management”. Activities include road management, medical analysis and Hollywood special effects.

This is a profitable business. Sales rose by 10.7% to £29.2m last year, generating a pre-tax profit of £3.7m. Although this was lower than the £5.1m figure reported one year earlier, this was largely due to investment in the business.

The group generated £2.3m of free cash flow last year and paid dividends of £1.2m, resulting in an increased year-end net cash balance of £9.8m.

Why I’d still buy

These shares have risen since I bought them for my portfolio. They now trade on a forecast P/E of 20 for the current year.

However, earnings per share are expected to rise by a hefty 37% in 2018/19, as recent investment bears fruit. This gives the stock a 2019 forecast P/E of 15, which I think is affordable for a growth business.

In the meantime, there’s a useful 2.1% yield, backed by a substantial cash pile. I continue to rate this stock as a buy.

The firm provides analytics software for motion measurement and infrastructure asset management to clients in more than 70 countries. Customers include highway authorities managing and maintaining road networks, hospitals and clinicians, plus Hollywood studios who use the software to create visual effects.

A five-year plan for growth

Today’s full-year results continue the trend in the finances. Revenue from continuing operations at constant currency rates rose 7.6% compared to a year ago and adjusted profit before tax dropped almost 24%. The directors reckon earnings are down because of planned investment in the Yotta division, which provides cloud-based infrastructure asset management software to central and local government agencies and other infrastructure owners.

Judging by the muted share price reaction this morning, I think investors are happy to back the firm’s five-year growth plan. I think we should expect such investment at this stage, one year into the plan. Ongoing top-line growth suggests the potential for enhanced profits down the road, and chief executive Nick Bolton seems pleased with this year’s outcome saying “annualised Recurring Revenues, a key metric for our five-year plan, has improved 22%.”

Oxford Metrics is reshaping its business for better growth, and I’m encouraged by the directors’ decision to raise the dividend by 20% this year in support of the firm’s progressive dividend policy. The outlook is positive, and I think the full ongoing growth potential of this company looks set to emerge over the next few years. It could prove timely to research the investment opportunity right now.

Finance in place

Meanwhile, Motif Bio (LSE: MTFB), the clinical-stage biopharmaceutical company, has seen its share price ease around 19% since I last looked at the firm on 4 October. Back then the share price shot up on the news of a positive top-line result from a global Phase 3 clinical trial called REVIVE-2. This focused on the firm’s investigational drug candidate iclaprim for patients with Acute Bacterial Skin and Skin Structure Infections (ABSSSI). That successful trial clears the way for the firm to submit a new drug application to the US Food and Drug Administration (FDA) in first quarter of 2018. 

Maybe Motif Bio is on the cusp of commercialising what could go on to be a big-earning drug. In the meantime, the firm lacks meaningful income, and I said in October that its finances looked precarious. But news arrived during November that the company has agreed a US $20m debt financing arrangement with Hercules Capital, Inc. a firm specialising in customised debt financing for companies in life sciences and technology-related markets.

Motif Bio plans to use the funds to finance pre-commercialisation and other activities leading to the anticipated US launch of iclaprim during 2019.  I reckon this is an encouraging development because it removes immediate worries over money and shows that Hercules sees potential for iclaprim. To me, the case for an investment in Motif Bio has improved and the fact that the share price is lower is a bonus.

The first of these is data analytics software group Oxford Metrics (LSE: OMG). The firm’s shares rose by 7% on Thursday, after it announced that adjusted pre-tax profit for the year ended 30 September is expected to be “slightly ahead of market expectations”.

Broker forecasts previously were for earnings of 2.3p per share for the year. In my view, the wording of Thursday’s update suggests that the final figure could be 5%-10% higher than this — perhaps 2.4p-2.5p.

That would still leave the shares looking fairly pricey, on around 25 times forecast earnings. But the company is expected to deliver substantial further gains in 2018. Recent forecasts suggest that earnings per share could rise by as much as 50% to 3.5p next year. That would give the shares a more reasonable P/E of 18.

Just another expensive tech stock?

Valuations for some tech stocks have become pretty steep in recent months. But in my view, Oxford Metrics’ fundamental quality suggests its valuation might be justified.

The first point to note is that it’s highly profitable and generates plenty of cash. The group’s operating margin was 18% last year, while return on capital employed (ROCE) — a key measure of profitability — was about 16%. Both figures are well above average.

Today’s trading update also suggests that Oxford Metrics has continued to generate strong free cash flow this year. Net cash for the year just ended was £9.8m, up from £8.3m the previous year.

High profitability and strong cash generation provide good support for the group’s dividend. This payout has grown by an average of 27% since 2011, and now offers a forecast yield of 1.7%. I plan to continue holding my shares following today’s gains.

A high-yield alternative

If you’re looking for small-cap stocks with a high dividend yield, you might want to consider spread-betting and stockbroking firm CMC Markets (LSE: CMCX). Its shares halved in value last year, when the FSA announced plans to limit the amount of leverage that could be offered to retail customers.

We don’t yet know what form these new rules will take. But in its latest trading statement, CMC emphasised its focus “high-value, experienced clients”, whose activity may be less affected by any changes to the rules. The group is also continuing its expansion into stockbroking through a partnership with one of Australia’s largest banks.

According to a recent trading statement, half-year profits are expected to be “significantly higher” than for the same period last year. The market has certainly regained its confidence in the business, as the shares have now risen by more than 50% from last year’s lows.

Is this view correct? It’s too soon to say. In the firm’s H1 trading statement, management warned that it “remains cautious about the future outlook given the ongoing regulatory uncertainty”.

However, the shares now trade on a 2017/18 forecast P/E of 12.5, with a prospective yield of 4.5%. In my view this is probably cheap enough to discount the risk from regulatory changes. I’d continue to hold.

Strong performance

Reporting on Tuesday was international software company, Oxford Metrics (LSE: OMG). It announced a rise in revenue of 17% for the first half of the current year, which represents record performance. Its adjusted profit before tax was £1.6m, which was in line with expectations after focused investments. With cash flow generation being strong and the company receiving the remainder of the 2d3 consideration, its cash balance increased to £11.1m from £5.8m a year earlier.

Oxford Metrics seems to be making encouraging progress with its five-year plan. It is on target with its goal of doubling profits and tripling recurring revenues by 2021, with the annual value of recurring revenues moving 13% higher in the first half of the year. With the launch of Yotta’s new software platform, Alloy, and the opportunity to strengthen and protect Vicon, the company appears to have a clear growth strategy for the medium term.

Looking ahead to next year, Oxford Metrics is forecast to record a rise in earnings of 57%. This puts its shares on a price-to-earnings growth (PEG) ratio of only 0.3. While still a relatively small company which is therefore relatively risky, its potential rewards could prove to be significant.

Improving prospects

Also offering upbeat growth potential is IG Design (LSE: IGR). The gift packaging and greetings card specialist is forecast to report a rise in its bottom line of 41% this year, followed by additional growth of 11% next year. This follows four consecutive years of profit growth, which suggests the company has a relatively resilient business model. Given the uncertain outlook for the UK economy, this could prove to be a positive for the company’s investors.

While it has a relatively bright outlook, IG Design continues to trade on a fairly enticing valuation. For example, it has a PEG ratio of 1.7. Given its consistent track record of profit growth, this seems to be a relatively appealing price to pay. It suggests that further share price growth could be ahead after the company’s 42% rise since the start of the year.

As well as growth prospects, IG Design could also become a strong income play. It may have a dividend yield of only 1.2% at the present time, but its shareholder payouts account for only 23% of profit. This indicates that rapid dividend growth could lie ahead – especially when the company’s forecast profit growth rate is factored in. Therefore, from an income, value and growth perspective, IG Design could be a shrewd buy.