Three quality small caps to snap up

Smaller companies have beaten their bigger rivals in the FTSE 100. Professional stock picker Ed Beal tips three to tuck away for the long run.

Each week, a professional investortells MoneyWeekwhere he'd put hismoney now.This week:Ed Beal,manager, DunedinSmaller CompaniesInvestment Trust.

Small companies have returned 10.4% (including dividends) in 2015 so far. That's attractive in any environment, but compares particularly well to the 2.8% from the FTSE 100. Why the divergence? Resources (mining, oil and gas) stocks, hit hard by falling commodity prices and slowing demand from emerging markets, are less important in the small-company universe than in the large-cap indices. Small companies also tend to be less exposed to emerging markets than their larger brethren.

That said, many of our investments have emerging-market exposure, which we think will be a good thing over the long run for several years one benefit of smaller companies has been their decreasing reliance on the domestic economy. Lastly, many smaller companies are actually trading respectably. Life is tough for most businesses, but with solid growth in the US and the UK, and a strengthening recovery in Europe, good quality companies are doing OK.

With interest rates set to rise on both sides of the Atlantic, 2016 will see an environment that many market participants are unaccustomed to. However, we believe that, over the long run, a company's fundamentals are the key determinant of its share price. We have a portfolio of good quality companies that we believe can prosper over time and whose balance sheets are strong enough to withstand periods of uncertainty. Here are three examples.

James Fisher (LSE: FSJ) is a leader in the marine support-services sector. It has very strong positions in a broad range of markets, including ship-to-ship transfer, submarine rescue, fenders, high-end compressors for the offshore oil industry, and coastal tankers. It also serves the nuclear industry (making complex manipulators for remote handling) a growing market, with several potentially large contracts available over the short and medium-term. There is also solid demand for its highly specialised dive systems. The shares trade on a price/earnings (p/e) ratio of 14, and the strong balance sheet allowed the management to raise the most recent dividend by almost 10%.

Oxford Instruments (LSE: OXIG) provides highly specialised products for the characterisation and determination of matter at the nanoscale (billionths of a metre). It gives exposure to a rapidly growing market, without having to take a view on which areas of technology will eventually win out. Everyone doing research in nanotechnology-related areas will need the associated hardware. While the industry is quite fragmented, the company has a market-leading brand. It has experienced tough trading recently, which has left the shares on a p/e of 12 attractive for a company that should benefit from long-term structural growth.

Genus (LSE: GNS) is the market leader in sexed semen for the beef and pork markets. As global protein consumption rises, so farms are pushed to industrialise. One of the best ways to increase yield per animal is to use genetics to improve the quality of the herd. Genus looks well set to benefit from this. The company will be subject to the cyclical nature of the agriculture industry, but it has successfully developed a royalty model that insulates it from the swings in the notoriously cyclical pig markets. It also has emerging technology in the provision of single-sex semen and in vitro fertilisation in cattle markets. Either could be very significant opportunities in the medium term. The shares trade on a p/e of 24.

Recommended

Why aircraft leasing funds look attractive now
Investment trusts

Why aircraft leasing funds look attractive now

Aircraft-leasing funds crashed during the pandemic, David C. Stevenson explains why the outlook for these funds may be improving.
15 Aug 2022
Share tips of the week - 12 August
Share tips

Share tips of the week - 12 August

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
12 Aug 2022
Aviva: One for income investors to tuck away
Share tips

Aviva: One for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
10 Aug 2022
Is abrdn’s eye-catching 9.2% dividend yield sustainable?
Share tips

Is abrdn’s eye-catching 9.2% dividend yield sustainable?

Shares in investment manager abrdn currently yield 9.2%. Generally speaking, says Rupert Hargreaves, it pays to be sceptical of very high dividend yie…
9 Aug 2022

Most Popular

Don’t listen to the doom-mongers – the future is bright
Economy

Don’t listen to the doom-mongers – the future is bright

With volatile markets, raging inflation and industrial unrest, it may feel like things are bad and likely to get worse. But the end of the world is no…
15 Aug 2022
How solar panels could lower your energy bill
Energy

How solar panels could lower your energy bill

Solar-panel installation firms are reporting a four-fold increase in orders this year compared with 2021. Ruth Jackson-Kirby explains how solar can he…
14 Aug 2022
Fill your portfolio with your very best ideas
Investment strategy

Fill your portfolio with your very best ideas

Fund managers’ top picks beat the market, but the rest of their portfolios often add little value, says Chris Sholto Heaton.
13 Aug 2022