Three Small Cap SuperStocks Worthy Of Further Research

14th Jul '23 by Mark Simpson

5 comments 3371 reads

As part of the Stockopedia Strategy Map, I have been taking a look at some SuperStocks, stocks that score highly on all three Quality, Value and Momentum Ranks. Last week, I took a deep dive into a SuperStock I know well: Quarto (LON:QRT) . This week, I pick three small cap Superstocks with StockRanks of 97 or over, which may be worth researching further: Severfield (LON:SFR) , Costain (LON:COST) and Tclarke (LON:CTO) .

Severfield (LON:SFR)

Profile

Severfield Rowan is a designer, manufacturer, and fabricator of structural steel. The type of projects are best known for are stadia and multi-storey car parks. However, they have recently had a divisional restructure into Commercial & Industrial, Nuclear & Industrial and Modular. By focusing on the latter two divisions, the company believes it can drive greater revenue growth, with less cyclicality and higher margins than their more traditional business. They have also undergone a multiyear operational improvement programme called Project Horizon. This has more than 100 initiatives to improve client service, boost productivity, and enhance their competitive edge over smaller rivals.

They are also not opposed to growing via bolt-on acquisitions either. They acquired Harry Peers in 2019. In April of this year, they acquired Dutch fabricator VSCH for E24m in cash. This gives Severfield a production foothold in Europe, which the group has previously supplied from the UK.

The Stockopedia algorithm rates the company highly for all the individual StockRanks, giving it a 99 StockRank overall:

Quality

The high Quality Rank is primarily driven by the high Piotroski score due to positive sales and earnings trends. The bankruptcy risk is also low:

However, the company's return on capital is not particularly impressive and may be below their cost of capital over the last few years:

This is a capex-heavy industry. Although we have yet to see the full impact of their initiatives to boost productivity, a lot of work is required to get this up to a level that long-term shareholders will be happy with. If they remain a low-ROCE business, the market is unlikely to give them a higher earnings multiple, meaning that any shareholder returns will come from earnings growth alone.

Value

The…

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Mikest1999

14th Jul '23

Nit-pick; it’s Severfield RowEn rather than Severfield RowAn

dunns_river_falls

Tclarke (LON:CTO) - bought this a few weeks back with some bad timing just before the placing. Not impressed with how the directors are looking out for themselves. Thought perhaps at the PDMR notification that maybe they had put their hands in their pockets to buy some shares in the market and show some confidence, but no. More free shares. Hoping to turn a quick profit and run as they are clearly not looking out for PI's. Tight stop loss in place. Shame as the co has great potential.

sevenccc

15th Jul '23

Hi Mark

Thanks for the suggestions. In large part they look interesting but there is one big but for all 3 from my perspective. Low Operating Margins. Does this not concern you? To me this largely invalidates the Quality scores, which are all 80+. Is that unfair?

Severfield score the best at 6%, the others struggle to get past 2.5% and haven't been able to breach this level for the last 5 years. Am I worrying about this unnecessarily?

BnB

They might be well-run companies and a successful investment at times but these are far from quality stocks in the true sense. Just the usual cyclical fare from UK plc.

Mark Simpson

17th Jul '23

I tend to not worry about operating margins. I think Gross Margins/ROCE/ROE are far more indicative of moats. Hence my concern with the low long term ROCE of Severfield (LON:SFR) . Indeed, one of the big learnings from studies of multi-baggers is that high gross margins and low net margins lead to the best returns, on average, due to operational gearing.

That said, i personally disagree with the high weighting of the quality rank towards the Piotroski F-score. This seems to be more momentum focused to me, and potentially leads to the ranks being less orthogonal than they otherwise might be.

Whatever, the rank it belongs to or the weighting, one thing is clear: SuperStocks outperform, on average, over the long term, whatever their operating margins.

Three small cap SuperStocks worthy of further research

Severfield (LON:SFR)

Profile

Quality

Value

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Mark Simpson

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