Three smaller companies that offer growth at a reasonable price

Professional investor Richard Penny of the TM CRUX UK Special Situations Fund selects three of his favourite small stocks that offer growth, but are not excessively priced.

The distinction between a “growth” investor and a “value” investor has always been a subject of heated debate. In recent years, the growth style of investment has been winning this debate and as growth stocks have become more popular and the winning fund managers get more money to invest, the prices of growth businesses have reached eye-wateringly high levels. As a result buying these growth shares or the funds that invest in them may not seem appealing, however strong the long-term investment drivers behind them may be.

However, there is a third way. While growth in revenues or profits relates to what is going on in a business, value is about how much you pay for that growth. It is sometimes possible to buy companies growing or exposed to growth trends in overlooked parts of the stockmarket.

The uncertainty surrounding the UK’s political and economic future recently led to the UK stockmarket trading at a big discount to its peers, with the biggest discounts to be found in the bottom 10% of businesses that make up the so-called “small companies” sector. We highlight three that offer exposure to growth where we believe valuations are not excessive.

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Cashing in on university spin-offs

IP Group (LSE: IPO) commercialises university intellectual property (IP). It was once a stockmarket darling, but the last five years have seen a big fall in the share price from 250p to 75p. We have some sympathy with the notion that many of IP Group’s companies were floated too early and that the shares had been a bit overhyped five years ago. IP Group has gone backwards while many investment plays in biotechnology, green energy and digital technologies have advanced strongly. Now, however, we see some good progress in IP Group’s portfolio, notably at Oxford Nanopore Technologies (which specialises in gene sequencing) and Ceres Power (green power) The net asset value (NAV) in June 2019 was 110p. We think that the good news will start to drive the share price of the company higher as the discount to NAV narrows.

Inspired Energy is looking more exciting

Inspired Energy (Aim: INSE) has if anything been a rather unexciting business; it sells energy to small companies. Still, there has been a nice progression of revenues, profits and dividends over several years. We think the company’s prospects look auspicious. It should thrive by selling energy-audit and clean-energy strategies to its captive client base. These green drivers should lead to a stockmarket reassessment and revaluation of the company’s shares.

Money in modifying genes

Twenty years ago the sequencing of the human genome was hailed as a great scientific breakthrough. There are now many new drugs being developed that involve gene editing.

MaxCyte (Aim: MXCT) makes scientific instruments for modifying genes and counts 20 of the world’s biggest pharmaceutical companies as clients in this novel field. Growth has been robust and has accelerated in recent months. MaxCyte also has deals in place with 60 pharmaceutical drug programmes worth up to $650m. We believe that this figure will grow significantly and that the share price trades at a substantial discount to its US counterparts.

Richard Penny

Richard Penny has been managing the Crux UK Special Situations Fund for the past five years. Prior to this, he spent 15 years as a Senior Fund Manager at Legal & General Investment Management (LGIM) where he managed the award-winning L&G UK Alpha Trust and L&G UK Special Situations Trust In June 2021, Richard got awarded a AAA rating from Citywire. Richard studied Engineering and Economics at the University of Oxford and he now shares his expert knowledge on shares in our MoneyWeek share tips.