5 small caps to buy in 2024

Michael Taylor reviews his 2023 portfolio of Aim stocks and chooses his top small caps for 2024.

Elevated view of London's Financial District at night
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Michael Taylor of Shifting Shares reviews his 2023 portfolio and picks his favourite small caps to buy for 2024.

Investors who are not comfortable in picking their own shares might want to look to funds instead. And there are lots of other tempting options in our guide to the top stocks for 2024.

2023 portfolio review
Small-cap stocks have struggled this year. None of the four stocks I chose at this stage last year finished in the black, despite some big gains during 2023.

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1. Brave Bison (Aim: BBSN), a media, marketing and technology play skewed towards social media, is currently down by 10%. This surprises me. It was cheap when I included it, and the brother directors (Oliver and Theo Green), who managed to expand their previous firm, Tangent, bought five million shares in November. I see no reason to abandon this position.

2. Altitude (Aim: ALT), a promotional products company that owns a platform connecting buyers, distributors and manufacturers, is unchanged. Investors may be loath to buy because the stock isn’t cheap, but profits are growing quickly. Once earnings catch up and bring the valuation down, the stock could bounce. If anything, the business case has become even stronger.

3. Australia’s Harvest Minerals, which produces the fertiliser KP Fertil in Brazil, has been a dreadful performer, slumping from 8.4p to 0.71p as fertiliser prices have slumped. If the business case recovers then the stock is a multi-bagger – but investors face the very real risk of a discounted placing or even a delisting. I would now avoid the stock until much of the uncertainty is removed. I’m happy to admit I got this one wrong.

4. Finally, XP Factory’s shares have slipped from 21.5p to 16p, but the company appears to be trading strongly. Escape rooms and experiential leisure are proving popular, and the Boom Battle Bar has been a solid acquisition. It offers a range of games including axe throwing, and is popular with parties. All the right metrics are pointing north. Cash is not a concern and the group should be able to keep funding its expansion.

Top small caps to buy for 2024

This year’s selection comprises a mix of profitable small caps and two high-risk special situations that are unprofitable yet have plenty of upside.

As always, consider them as suggestions for you to do your own research. I have done my best.

1. Renold (Aim: RNO), 34p

Renold is a manufacturer of industrial, bicycle and motorcycle chains, and machine components. It’s a thoroughly unexciting business, and yet the stock price has more than held its own in the past two years as the company has repeatedly put out good news. 

After the last update, house broker Cavendish produced an adjusted earnings-per-share (EPS) target of 6p for 2024, with £19.2m of adjusted profit forecast. At the current price of 34p, that means the stock is trading on a price/earnings (p/e) ratio of less than six. There has been no dilution of shareholders since 2018. 

The business is self-funding small, bolt-on acquisitions and so there doesn’t appear to be a need to come to the market for more cash. There is, however, a large pension deficit sucking capital from the business. Net cash flow (after tax) was £11.7m in the six months to 30 September, but there was a £6m outflow for pension contributions. Still, £2.6m of this was accelerated and originally planned for the second half of Renold’s financial year. The deficit will become smaller over time, so I don’t believe this is anything to worry about. 

I am quietly confident that in the coming bull market, Renold could double from this level. That won’t happen overnight unless someone bids for the entire company. But it is a resilient business on the front foot. Given the earnings growth, the market may eventually want to rerate the stock from six times earnings to a higher value.

2. Supreme (Aim: SUP), 112.5p

Supreme is Europe’s leading provider of wholesale batteries, lighting, vaping and nutritional products. 

It has established close ties with Duracell and Panasonic, but it’s the vaping side of the business that attracts attention. Many say this is because it is a nicotine product and thus triggers a similar reaction to alcohol, tobacco and gambling companies. But while all of these can be addictive and ruinous, I am confused as to why defence companies are often left out of discussions about ethical investments. People can choose to smoke, drink, gamble, and vape. Nobody chooses to be bombed. In any case, everyone is entitled to their own opinion. 

It has been suggested that this company may not achieve the valuation it would otherwise deserve because of objections to vaping. I don’t believe that, as the numbers are compelling. This is a fantastically profitable business, and house broker Shore Capital expects EPS of 17p this year, giving the company a price/earnings (p/e) ratio of seven at the current price of 120p. 

On the cash front, there was an outflow of £2.7m overall in the half-year to 30 September, but this was due to a £16.4m investment of working capital to support ElfBar– Supreme had been selected as a master distributor for the online vape store brands ElfBar and Lost Mary. Excluding this investment, operating cash flow was £17m. The company has £5m of net debt but also an unused £35m debt facility to make more acquisitions. 

This sounds good so far, but there may be trouble ahead. We are awaiting the results of the consultation on possible new UK e-cigarette regulations that ended on 6 December. The company has made moves to pre-empt this by changing packaging to make it less appealing to children, but will it be enough? Under a Labour government, vapes may only be available under prescription, following Australia’s move in 2021. My feeling is that removing a less harmful way of getting a nicotine hit and a way for smokers to reduce their cigarette consumption – some people use vapes to help them give up smoking altogether – makes no sense. But it’s clearly a big risk. 

Supreme has also seen plenty of growth, although this has largely come from ElfBar, which it doesn’t actually own. I believe the balance between potential risk and reward is priced attractively on a p/e of seven.

3. Afentra (Aim: AET) 31.5p

Oil and gas explorer Afentra, short for “African energy transition”, changed its board in May 2021. Paul McDade, former CEO of Tullow Oil, now runs the firm. He plans to buy assets and use his knowledge and connections to improve them. 

The company finally completed its Sonangol acquisition in Angola on 8 December. This is a deal that gives the company non-operating interests in two areas in offshore Angola. The deal is scheduled for completion on 1 December next year. Afentra should be able to generate $49m in adjusted EBITDA in 2024, compared with a current market value of £70m. Profit before tax is forecast to reach £23.8m, meaning the company will trade on a single-digit p/e, assuming everything goes to plan. The Sonangol acquisition will provide free cash flow for the company to buy existing assets as well as provide lending facilities with which to go after more targets. 

A bet on Afentra is a bet on CEO Paul McDade. He has certainly bet on himself, scooping up £199,550 of shares in August 2022.

4. BSF Enterprise (LSE: BSFA)

BSF Enterprise is a biotechnology company that acquired cell-based tissue engineering company 3D Bio-Tissues in 2022. A share placing allowed it to raise £1.75m at 7.37p to finance the takeover, and it mustered another £2.9m at 17p in an oversubscribed placing in April 2023. 

The company aims to replace animal meat tissue with lab-grown, scaffold-free bio-equivalents. The scaffold is the structure that holds the meat together, and it is often synthetic or plant-based in lab-grown meat products, altering the texture of the meat. Tests showed that BSF’s cultivated meat was very similar in appearance to conventional meat in the raw state, and when cooked it was also consistent in terms of appearance, aroma, and tendency to sear or crisp. 

If we assume that operational cash-flow costs remain the same, then the company is likely to have enough capital for well over 12 months, allowing it time to make further progress with its products and build commercial relationships. The stock is unprofitable and so it must be regarded as speculative. But with the company also producing lab-grown animal skin for the tanners of a luxury leather goods manufacturer to test, and having sent its patented City-Mix (a supplement that boosts cell production) to several customers to test, there is ample upside if BSF can monetise its assets effectively.

5. PCI-Pal (Aim: PCIP), 50p

This company provides payment services for cardholder-not-present (CNP) transactions. It has been the subject of a lawsuit from competitor Sycurio, while a profit warning has also contributed to the recent share-price decline. 

Broker Cavendish has trimmed the company’s sales growth forecast for the year to 30 June 2024 to £19.1m from the previously expected £20m. But given the £14.9m achieved in the previous year, the company is still growing quickly and has reiterated that it expects its first full-year adjusted profit this year. 

Management believes the lawsuit was designed to put a spanner in the company’s growth, and on 25 September PCI-Pal announced it had won the case in the UK High Court. The company showed not only that Sycurio’s patent was invalid, but also that even if it had been valid, PCI-Pal’s Agent Assist solution would not have infringed it. The company is seeking a full recovery of costs in the UK, but it is not out of the woods yet, as the US lawsuit is still ongoing. Therefore, I have to regard this company as speculative and highly risky due to the lawsuit. The group is also still in the red, although this is expected to be the first full year of adjusted profit. Should the lawsuit go the wrong way in the US, then the share price could go much lower. 

However, given the current share price is only slightly above the price before the news of PCI-Pal’s total victory, I believe this risk is more than priced in.

Michael Taylor holds long positions in ALT, BBSN, RNO, AET, BSFA and PCIP. You can get Michael’s monthly Buy the Breakout newsletter for free at shiftingshares.com. Follow Michael on X (formerly Twitter) @shiftingshares.

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Michael Taylor is an ex-trader. For more from him, see shiftingshares.com.