This secret small-cap growth and dividend stock still looks ridiculously cheap

Adult woman holding a finger on her lips over white background
Adult woman holding a finger on her lips over white background

Thanks to their potential for growing revenue and profits at a faster rate than most lumbering FTSE 350 stocks, it's not hard to see why so many private investors regard small and micro-cap companies as the source of potential riches. Add a bit of income to the mix (which can then be reinvested), and the benefits from focusing lower down the market spectrum arguably outweigh the risks involved, particularly if you're a young investor with plenty of years in the market ahead of you.

I've long thought pawnbroker H&T Group (HAT) fits the bill nicely.

"Solid start"

Having seen an influx of new customers, pre-tax profit rose 10.9% to £6.1m in the first half of 2018. That's a pretty good result given that the average gold price dipped 2.6% (to £958 per troy ounce) over the reporting period. All told, the company's net pledge book rose 8.6% in value to £47.8m.

Elsewhere, the £117m cap's personal loan book soared by 78% in value over the reporting period to £17.8m. In addition to this, I particularly like the fact that 54% of H&T's lending now falls outside of the "High-Cost Short Term credit category", implying that it has no intention of pursuing a questionable 'growth-at-any-cost' strategy.

Hailing a "solid start to the year", CEO John Nichols stated that the company would carry on investing in its digital offering following the overhaul of the retail-focused, in addition to H&T's main site. Given the importance of offering a quality online experience these days, that seems sensible to me, even if the increase in expenditure has contributed to a sizeable rise in net debt from 11.5m in June 2017 to the £16.8m revealed today.

But H&T should have appeal for income as well as growth-focused investors. The 2.3% increase to the interim dividend (to 4.4p per share) may look modest but the company is forecast to yield 3.7% in the current financial year, with the payout easily covered by profits.

H&T's shares were up over 4% in early trading, suggesting that the market is more than satisfied with progress at the Sutton-based business. Notwithstanding this, the stock still looks a screaming bargain at just 9 times earnings, particularly for those who are pessimistic on the health of the UK economy in the short-to-medium term.

Even bigger yield

While I continue to be a fan of H&T, I'm even more positive about its high street jewellery rival Ramsdens Holdings(LSE: RFX). It does, after all, boast a higher forecast yield (4.5%) and net cash position.

That said, the recent disposal of shares by management hasn't helped sentiment towards the stock, compounded by investors' growing indifference to the shiny stuff. Back in June, the company's IT Director, the wife of its Operations Director and CEO Peter Kenyon all sold significantly large proportions of their holdings.

While such news may have unnerved some investors, I can't see anything to worry about just yet. With recent trading being very strong, I'm attributing the sales as nothing more than a desire to crystallise profits following the doubling of Ramsden's share price since coming to the market back in February 2017. I could be wrong, of course.

Even if the stock continues to struggle for a while yet, the fact that it changes hands on a near-identical P/E suggests Ramsdens is just as much -- if not more -- of a bargain as H&T.

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Paul Summers owns shares in Ramsdens Holdings. The Motley Fool UK has no position in any of the shares mentioned. 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 us better investors.