UK Edition
Investing in the stock market effectuates a rollercoaster of emotions. Its inherent ups and downs prompt fear, greed and countless other feelings among even the most cold-hearted of investors.
Of course, the severity of any peaks and troughs is often greater for investors in small-cap stocks than their large-cap counterparts. While often riskier due to their more limited size and scale, as well as their weaker financial standing, smaller companies can offer higher returns over the long run as a result of their capacity to deliver superior rates of sales and profit growth.
Currently, the FTSE AIM All-Share index is experiencing a prolonged and severe downturn. It has fallen by 22pc over the past year and now trades below its pre-pandemic level.
Many investors have fled to less risky, larger stocks due in part to an uncertain near-term economic outlook. In Questor’s view, this provides an opportunity for long-term investors who can ride out elevated short-term volatility to purchase high-quality smaller companies that trade at discounted prices.
Indeed, the financial performance of many small-cap stocks is relatively encouraging despite ongoing economic uncertainty. For example, Bioventix, which has been a holding in this column’s inheritance tax (IHT) portfolio since January 2020, released upbeat half-year results last month.
They showed that the manufacturer of antibodies used in diagnostic applications such as blood testing generated an increase in revenue of 25pc and a rise in pre-tax profits of 27pc versus the same period of the prior year.
This enabled it to raise dividends per share by 20pc, while its cash balance increased marginally to £5.2m. This is slightly above the £5m figure that the company deems to be sufficient from an operational and strategic standpoint, which suggests that a further rise in profits is likely to passed through to investors in the form of higher dividends.
Bioventix’s improving financial performance, and solid balance sheet, mean it is well placed to continue investing in research activities that can catalyse its bottom line over the long run.
Clearly, the ultimate success of its variety of research projects cannot be accurately forecast and their impact on its financial performance may not become apparent for many years. However, royalty income from the sale of diagnostic products that are based on the company’s antibodies by its customers provides a degree of ballast.
It contributed around 70pc of revenue in the most recent full year. And with the company enjoying a significant barrier to entry as a result of a lengthy regulatory process concerning the approval of a particular antibody on a specific testing machine, its competitive advantage is set to translate into growing sales and profits over the coming years.
Since being added to this column’s IHT portfolio, Bioventix has posted a capital gain of around 14pc. Over the same period, the FTSE AIM All-Share index has fallen by around 14pc. While a 28 percentage point outperformance of the wider index represents an encouraging relative return thus far, the company appears to be poised to deliver further capital growth over the long run.
Its competitive position, financial standing and growing profitability suggest its shares have the potential to gain ground as the economy and stock market’s current trough gradually ends and the journey to the next peak begins. Hold.
Questor says: hold
Ticker: BVXP
Share price at close: £37.75
Update: FD Technologies
Another of our IHT portfolio holdings, FD Technologies, released a trading update earlier this month. The software company, which was previously called First Derivatives, stated that it expects revenue for the year to February 2023 to rise by around 12pc versus the prior period.
This was in spite of a stronger US dollar in the second half of the year, with weaker demand experienced by its MRP division, which accounts for 14pc of revenue, being offset by its KX and First Derivative businesses.
The company’s net debt position of £7.4m at the time of its half-year results in August now stands at a net cash position of £400,000. Full-year results are due to be released on May 23.
The company’s share price has gained 5pc since the release of its trading update. However, it is still down by 61pc since being added to our IHT portfolio in June 2018 versus a 24pc decline for the index. In Questor’s view, FD Technologies deserves more time to deliver on its potential. Hold.
Questor says: hold
Ticker: FDP
Share price at close: £17.54
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