Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Equities

Three small cap successes from 2020

  • 28 July 2021
  • 7min read

As the economy emerges from the pandemic, we’re seeing interest in smaller companies grow. This segment of the market typically does well during periods of strong growth, as they benefit from both their own ability to grow and a rosy economic outlook.

Many small companies are actually coming out of COVID-19 stronger, partly because the pandemic reinforced secular tailwinds such as growing digitalisation. The following are some of my ‘small cap highlights’ from 2020, those companies who kept on delivering despite the pandemic, and could potentially continue to do well.


A digital music champ – Gear4Music

The most material contributor to performance in the period was Gear4Music whose shares were up over 200% in 2020. The online e-tailer of music-related products benefitted from many of its high street peers being closed over for much of the year. Its scale, speed of delivery and strong brand perception (as measured via its Trustpilot score) all contributed to drive top line growth of over 30% in the period, accompanied by record gross margins of almost 30%.

An adept buyer of businesses – Future plc

Media company Future plc continued its excellent growth track record. Its expert online content, consumed via websites such as Tech Radar and Digital Photographer, proved particularly popular during lockdowns driving impressive growth in online advertising and ecommerce revenues. The integration of the TI Media assets, which contained titled such as Country Life and Homes and Gardens, was also successfully executed during the period.

The company did attract some scepticism when it took over the GoCo (the company behind the GoCompare price comparison site) but the deal appears to be progressing well and Future more widely is trading ahead of expectations.

And one we’d been watching – Science in Sports

With sentiment to consumer names so impacted by the pandemic, some enticing investment opportunities were presented, particularly in the volatility of late spring 2020. We took a position in Science in Sports, a leading player in the sports nutrition market.

It is a name we have tracked closely over several years but struggled to see a clear route to profitability and were concerned that the returns on their marketing investment were not high enough. However, in December we took a position in the company as we were very impressed by growth rates, gross margin improvements and greater levels of marketing discipline. An overhang of stock presented an attractive entry point in December at 29p and this has subsequently proven to be a rewarding decision.

Can smaller companies continue their good run?

There are many difficult decisions ahead for the UK, with increased taxes already in the pipeline and an apparent tussle between Boris Johnson and Rishi Sunak over how room government really has to spend big.

That said, there appears to be a sharp, consumer-led recovery taking hold. Depending on who you ask, UK consumers are sitting on anything between £100-200bn of excess savings, with that extra cash starting to show up in the real economy. March mortgage approvals, while almost 20% lower than the November peak, remain almost 27% higher than the average of 2018-19. The derivative of people spending more on their homes, which are so often now their place of work, is that construction and repair, maintenance and investment) activity is elevated.

Many buoyant end markets are driving a positive earnings outlook.  The consensus EPS revisions for both 2021 and 2022 in small caps are currently at their highest ever level according to HSBC, with growth for 2021 rising from 39% in January to 62% at present. It is encouraging that growth forecasts for 2022 sit at 10% and are little changed year to date – there is a danger of the market becoming too optimistic, which could prove unhelpful. Smaller companies have been particularly conservative in their outlook and we are encouraged that the mantra of ‘under promise, over deliver’ is largely being adhered to.

All stock/company examples are for explanatory/illustrative purposes only. They should not be viewed as investment advice or a recommendation from AXA IM.

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Equities

Views from our UK income managers

  • 13 September 2021
  • 5min read
Equities

Outstanding opportunities on offer as the UK economy reopens

  • 06 September 2021
  • 5min read
Equities

UK Equity Quick Take: IPOs, ESG and M&As

  • 27 August 2021
  • 5min read

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This promotional communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice. This material does not contain sufficient information to support an investment decision.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.

    The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.

    Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. References to league tables and awards are not an indicator of future performance or places in league tables or awards and should not be construed as an endorsement of any AXA IM company or their products or services. Please refer to the websites of the sponsors/issuers for information regarding the criteria on which the awards/ratings are based. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment.  Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.