The small-cap end of the market is home to some unusual and profitable businesses. These can add useful diversity and growth to your portfolio -- one company I'm going to look at today could even prosper during a recession.
A protection business
In an increasingly connected world, protecting your intellectual property is more important than ever. For UK investors wanting exposure to this specialist business, choices are limited.
One option is AIM-listed Murgitroyd Group (LSE: MUR). Pre-tax profit at this £50m firm rose by 13% to £1.67m during the six months to 30 November. The group ended the period with an increased net cash balance of £2.6m, and the interim dividend has been lifted 30% to 6.5p per share.
These results look fairly solid to me, but of more interest could be the company's comments on growth trends in this sector. Official figures show that EU trademark filings rose by 8.9% during the 11 months to 30 November, compared to the previous year. Murgitroyd describes this continued growth as part of "a long-term trend".
Although Brexit is a potential risk for the group, it already employs qualified attorneys from 14 European countries and has an established presence in both the EU and the UK. The business is also expanding into the US market, where it provides European IP protection services for US companies.
Murgitroyd shares were hit by a profit warning at the start of 2017, but the group appears to have returned to growth since then.
The shares currently trade on a 2017/18 forecast P/E of 17 with a prospective yield of 3.4%. That's not obviously cheap, but I believe it could represent good value given the underlying growth in demand. In my opinion, this stock could be worth a closer look.
Profit from a recession?
The recent collapse of Carillion highlighted tough trading conditions in the construction and support service sectors. Indeed, there are concerns that the failure of this former FTSE 250 firm could bring forward the failure of a raft of smaller business in these sectors.
Insolvency specialist Begbies Traynor (LSE: BEG) recently reported that the number of support services companies showing "significant" financial distress rose by 43% last year. Numbers in the construction sector rose by 31%, while those in the real estate sector increase by 46%.
I believe that this Manchester-based firm could provide a something of a hedge to the risk of a UK recession. If the number of businesses in financial distress rises, then there's a good chance of an uptick in demand for insolvency services.
Growth has been limited in recent years, partly due to banks' reluctance to force companies into insolvency in the period after the financial crisis. However, Begbies' efforts to cut costs and diversify saw the group return to growth last year.
Analysts expect this progress to have continued during the current financial year, which ends on 30 April. Consensus forecasts suggest that adjusted earnings could rise by 13% to 3.7p per share, with a similar increase expected in 2018/19.
Although the stock's forecast P/E of 20 means that the shares are no longer obviously cheap, they still offer a useful 3.1% dividend yield. I think there's a good chance of earnings upgrades over the next year or two, and would certainly continue to hold.
This small-cap could be worth 56% more
The companies I've written about today both appear to have a positive outlook. But our top stock analysts have identified another small-cap company which they believe could be worth up to 56% more.
This profitable UK-based business is somewhat out of favour at the moment. But the stock looks cheap to me and could prove to be a bargain buy. If you'd like to know more, download 1 Top Small-Cap Stock From The Motley Fool today.
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Roland Head has no position in any of the shares mentioned. 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.