April was a very good month for UK small caps and momentum carried through into May. This follows a pause in progress earlier in the year when rising bond yields were holding equities back. That uptrend in bond yields halted in March and they have tracked sideways since.
This in turn has allowed an improved tone in growth stocks, reflected in a return to form by the bellwether Nasdaq index, along with many of the AIM tech stocks we follow. However, it still seems reasonable to lean towards the value theme in our small-cap stock selection.
Value has been outperforming since the Pfizer vaccine was announced in early November 2020 and should continue to do so given the prospects for a strong post-Covid-19 recovery.
Furthermore, growth stock valuations remain quite stretched – that pause mentioned above was nowhere near serious enough to bring about a correction and make them look attractive again.
There is also another reason to favour value over growth: the threat of rising inflation. This would undermine ultra-low interest rates and those high P/E ratios attached to growth stocks.
The authorities are currently brushing off evidence of inflation as a ‘transitory adjustment’. This complacency is no doubt down to a desire for a modest amount of controlled inflation
to offset the burden of excessive government borrowing.
Demand is rising as economies reopen, while the deflationary benefits of globalisation are fading fast and possibly reversing in some areas.
Commodity prices are moving ahead on a broad front and with ultra-loose monetary and fiscal policies being pursued by most countries, there is a risk that the inflation genie could be let out of the bottle. And once out, it can be a very hard and painful process to get it back.
Jubilee Metals is a metals recovery business, treating tailings created by third-party mining operations. Strength in platinum group metals (PGM) prices is driving performance, with revenue from the three South African sites up 31% last year in sterling terms. Costs are low with waste materials at surface level, meaning there is no mining risk.
Jubilee Metals aims to treat a broader range of metals than PGMs and related chromium, as well as diversify into other territories.
It sees itself as a young growing company, which has encouraged it to move into Zambia where it has a copper refinery and tailings processing. This is where the major expansion is expected, with cobalt and vanadium production alongside copper.
There is no problem repatriating cash from Zambia and forecasts are for substantial growth in revenue and cash over the next couple of years as production increases.
Net cash is expected to reach £156m by June 2023.
Tracsis is a software company, but one with plenty of post- Covid-19 recovery potential in its data and events arm as traffic levels return to normal.
We also like the new management, who should improve returns by getting the subsidiaries to work better together and reap the benefits of being part of a group.
First-half revenue to January was up 5% in the businesses unaffected by Covid-19 but this does not reflect four new contracts that will go live in the current period.
Three TRCS Enterprise projects are being implemented and there are a further 20 train operators to target, each with a £0.5-1m contract value. There is a record pipeline in all areas of the rail business which should support double-digit revenue growth.
Lockdowns had an impact on traffic censuses and March was the first month that survey demand returned to normal.
M&A is on the agenda with £20m net cash.
David Thornton is editor of Growth Company Investor.
See also: Switched on to small cap growth stocks – Good small-cap growth stocks can be found but as the valuation gap between value and growth widens it pays to be picky on price.