2 small-cap stars that could make you brilliantly rich

The Motley Fool

Goodwin(LSE: GDWN) has been a stellar small-cap performer in recent yers. It posted earnings per share (EPS) of 14.61p in 1999 and in its latest annual results, released yesterday afternoon, it reported EPS of 84.47p. The dividend has advanced from 2.94p to 42.35p over the same period. And the share price has climbed from 78.5p at the dawn of the century to 1,511p today.

This FTSE SmallCap-listed £109m company isn't a needle-in-a-haystack breakthrough biotech or disruptive digital star. It's a thoroughly unglamorous mechanical and refractory engineering company that's been around since 1883.

Long-term mindset

I've put Goodwin into a long-term context for you, because on a short-term view, with the shares having been above 4,000p just a few years ago, you might be inclined to think that the company is a distinctly unpromising prospect to make you brilliantly rich.

Having made the point that, despite the recent slump in the shares, Goodwin has delivered a tremendous return for long-term investors, let me also explain why I'm confident it will go on delivering long-term returns.

The company does significant business with the oil, gas and mining industries where capital expenditure has massively reduced over the past few years. Despite the inevitable pressure on Goodwin's top line and gross margin, the business has remained profitable. And, in contrast to many other companies involved in, or exposed to oil, gas and mining, its balance sheet has also remained healthy. Debt has increased but net gearing is still a very conservative 31.4%.

I put its resilience down to the long-term mindset of the successive generations of the family who've carefully stewarded the business to negotiate the bad times as well as thrive in the good. This is the sort of company I'd happily build up a holding in by regularly investing through rain and shine. Times of rain -- as now -- I'd view as an ideal starting point.

Another in the same mold

AIM-listed timber firm James Latham(LSE: LTHM) has the same attractive qualities as Goodwin. It was founded in 1757, continues to be stewarded by descendents of the founding family and has delivered excellent long-term returns for shareholders.

Adjusting for a four-for-one share split in 2005, EPS has increased from 7.425p in 1999 to 56p in its latest financial year. The dividend has advanced from 2.75p to 15.35p over the same period. And the share price has climbed from 238.5p at the turn of this century to 897.5p today, valuing the business at £176m.

At its AGM today, Latham said April-to-July revenue was 6% ahead of the same period last year and that customer activity remains positive but the trading environment competitive. The company has invested in new sites for growth and efficiency but said cash reserves remain strong (there was net cash of £16.3m on the balance sheet at the 31 March year end).

One way Latham currently differs from Goodwin is that its share price isn't depressed. In fact, its shares have made new all-time highs this year. Nevertheless, I continue to see this as a business that could deliver great rewards for long-term investors.

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The Motley Fool UK has recommended Goodwin. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes