Find hidden value in small caps

To find undiscovered value, you have to look at small-caps, says professional stock picker Chris Hutchinson. Here, he tips three smaller London-listed stocks to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Chris Hutchinson, senior fund manager, Unicorn Asset Management.

Real undiscovered value lies within listed companies whose market capitalisation is below £50m. At these levels, there tends to be an absence of decent research, either from brokers or on the web. Most fund managers are put off as their funds are too large to take any meaningful position. So they miss the gems that exist across a diverse range of sectors. Typically these are run by strong management teams who are executing a focused and sustainable growth strategy. Here are three examples.

Driver Group (LSE: DRV) is a global consultancy business offering expert services across a range of sectors including construction, civil engineering, energy and industrial. Traditionally, these services focused on dispute resolution within the construction industry. However, over the past year and following the appointment of a new chairman, the business has diversified into new areas of expertise, whilst also completing a major restructuring and cost-cutting exercise. As a result, Driver Group has now returned to profitability and is continuing to grow its international operations.

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In the six months to 31 March 2012, revenues increased by 35% to £10.6m, whilst pre-tax profits reached £731,000 (versus a loss of £140,000 over the same period in 2011). The business is inherently cash generative net cash on the balance sheet amounted to almost £1m. In May, Driver announced the acquisition of Trett Consulting, a renowned consultancy business focused on dispute management and resolution services. This acquisition strengthens the firm's core capabilities and appears to be an excellent strategic fit.

My second tip, Tracsis (LSE: TRCS), is a developer of resource optimisation, data capture and reporting technologies for the transport industry. The business started as a university spin-out offering an accurate and efficient software solution to highly complex crew scheduling for the train operating companies in the UK. Since listing on Aim in November 2007, the management team has delivered strong organic revenue and profits growth and diversified the business through acquisition.

Tracsis now offers a range of products and services which allow transport operators and infrastructure owners to gain control over all aspects of their operations and achieve big cost savings. In its trading update on 9 August 2012, the firm confirmed that forecast year-end revenues would be in excess of £8.5m (2011: £4.1m), resulting in adjusted EBITDA of more than £3.0m (2011: £1.2m). Cash at the end of July was around £7.5m and the business remains debt-free.

Thirdly, there's Zetar (LSE: ZTR), a sweets and snacks group, which recently announced results for the financial year ended 30 April 2012. Sales fell 5% to £128m and pre-tax profits were 17.5% lower at £5.5m. This was due to a strategic exit from low-margin commodity snack products combined with poor confectionery sales during the key Easter period.

The firm nonetheless delivered strong cash flow resulting in net debt being reduced by £4.1m to £10.8m. Zetar is now a well established supplier of high-quality everyday snacks and sweets to all the major UK supermarket chains. It is also rapidly expanding its portfolio of licensed products. The new financial year looks to have begun well with sales up 7%.