For most investors, individual equities should only be used as satellite holdings, as funds – whether they are open-ended, closed-ended, active or passive – should provide the bulk of a portfolio. Even if investors do want to buy stocks, they will usually gravitate towards large cap or established names anyway as those companies often come with a higher degree of safety.
However, while smaller companies tend to have more volatile share prices, history has proven that they can deliver very high returns for investors as they often grow much faster than the market average.
With the ISA deadline fast approaching and new rules now in place so that savers can include FTSE AIM-listed stocks in their tax wrappers, Graham Spooner (pictured) – investment research analyst at The Share Centre – picks out four stocks he thinks can spice up an investor’s portfolio this year.
Stadium Group
First on the list is Stadium, which Spooner says is becoming a leading player in niche integrated electronic technologies, with capabilities to design and manufacture for specific customer needs.
Technology as a theme is increasingly back in favour with investors who have managed to look past the calamities of the dotcom bubble of the late 1990s and Spooner says the Hartlepool-based company is well-positioned to grow over the coming years.
“The two acquisitions of IGT Industries and United Wireless have supported this successfully, as has the upgrade of production facilities in the UK and Asia,” Spooner said. “The company’s objective is to gain market share through new business, while maintaining the level of activity in those core areas which have a mature base of established customers.”
The company, which has a market cap of just £38m, has delivered stellar returns to investors over the past year. It is up 74.45 per cent while the wider FTSE AIM index has lost close to 20 per cent.
Performance of stock versus index over 1yr
Source: FE Analytics
Despite this performance, Spooner still thinks now is a good time to buy.
“As a small AIM company with the potential for rapid growth, this is a higher risk investment. Unlike many of its AIM contemporaries, it also offers a progressive dividend policy with a forecast yield for 2015 of 2.2 per cent.
“After the recent rise in the share price, investors are advised to drip feed into the shares by building a holding over time.”
Paul Mumford’s Cavendish AIM fund is the only portfolio in the IA universe to count Stadium as a top 10 holding, while Chelverton’s Small Companies Dividend Trust is the only closed-ended fund to have a major position in the stock.
Optimal Payments
Spooner also likes Optimal Payments, the £587m online payment software specialist.
“The group is attractive for investors as it has strong earnings growth and a good balance sheet, allied to the significant growth opportunity for its products in the US and around the world,” he said.
Shares in Optimal Payments have tumbled in value over recent weeks due largely to a market misunderstanding, as the company was embroiled in a director share holder dealing controversy when the company provided more details about a trade by its chief exec made this time last year.
Performance of stock versus index over 6 months
Source: FE Analytics
However, Spooner says investors shouldn’t be put off the stock.
“Current trading is strong, with both sales and earnings forecast to continue growing strongly over the next three years at least. The company will benefit from the strength of the US dollar, which is expected to continue to rise due to robust economic growth and in anticipation of a return to rising interest rates.”
“The US is key for the company, as three states have liberalised online gambling recently and there are hopes California and Pennsylvania may follow soon. A further boost could come if PokerStars, the largest online poker platform, receives approval for a New Jersey licence in 2015.”
According to FE Analytics, there are six funds that count Optimal Payments as a top 10 holding. They include Investec UK Smaller Companies, Old Mutual UK Dynamic Equity and Threadneedle UK Mid 250.
Iomart
Sticking with the tech theme, Spooner picks out cloud computing specialist Iomart as a decent long term holding. Shares in the company, which has a market cap of £220m, have fallen over recent months thanks to weaker than expected growth and a failed take-over bid, but Spooner says this is an exciting business to play the rise in cloud computing.
“This industry is expected to grow fairly rapidly as technology and consumer habits online continue to evolve. As one of the longest established in its sector and a leader in the UK, Iomart offers investors an attractive way to gain exposure to this market,” he said.
“The company offers global diversification as it owns eight data centres spread out across the UK, six in the US and one in Dubai and Singapore. It has partnerships with some of the largest computing businesses in the world such as Microsoft and Dell, and is operationally geared so it can take more business for relatively little cost.
“Investors should note that Iomart’s management turned down a takeover approach recently; however, we believe it still remains a potential takeover target.”
Performance of stock over six months
Source: FE Analytics
Spooner says that despite the recent share price falls and adjustable profit being short of market expectations, it is still a company with decent longer term growth prospects.
He added: “The fall in share price should be viewed as an attractive entry point for investors looking for capital appreciation and willing to accept a higher level of risk.”
Unicorn UK Growth is one of only two funds that count Iomart as a top-10 holding, according to FE data.
OPG Power Ventures
The final stock on the list is OPG Power Ventures, which operates small- and medium-sized coal-fired power plants and offers decent exposure to the emerging market growth story.
The market cap is £330m and Spooner is confident about the company’s growth potential, especially as the management is expanding its Indian operations to take advantage of the supply/demand shift in the country’s need for power.
“The result of the Indian election in 2014 gave the market a boost, and if the new government can deliver on some of its aims for reliable power as a foundation of the country, then OPG could be a beneficiary.”
“Its plants are located near to ports and can burn a variety of coal. New energy plants are set to come on stream in 2015 and the company has a good record for hitting its schedule. Results continue to highlight the progress the group has made over the last year and significant growth in profits is predicted by 2016 – as well as dividends.”
Shares in OPG Power Ventures are up 10 per cent over the past 12 months, but as the graph below shows, investors have had a volatile time of it this year.
Performance of stock versus index over 1yr
Source: FE Analytics
Nevertheless, Spooner firmly believes OPG Power Ventures can offer investors decent long-term returns from here.
“Having fallen from its November high, the current share price provides a more attractive entry point for high risk investors seeking to benefit from the demand for power in India,” Spooner added.
Premier Global Utilities Income and Premier Energy & Water Trust Securities – which are both managed by Claire Long and James Smith – are the only two portfolios in both the open and closed-ended universes to count the stock as a top 10 holding.