10 UK small cap stocks to watch

Small cap stocks: what you need to know

Generally speaking, a company’s market cap is a way of determining how established it is. Though there is no precise definition, ‘small cap stocks’ are often thought to belong to a company with a market cap of less than £1.5 billion, but this can differ from country to country.

If you’re interested in small cap stocks, it’s important to know what the advantages and drawbacks are. One of the potential pros of a small cap stock is its growth potential. For example, it could be much easier for a company with a market cap of £300 million to grow by 10% (£30 million) than it would for some companies valued at £1 billion (£100 million). On the other hand, small cap companies often come with higher risks, including less capital and lower trading volume (liquidity).

UK small cap stocks to watch

1. Thomas Cook Group
2. Petra Diamonds Ltd
3. EnQuest
4. AA
5. Countrywide
6. Capital & Regional
7. Petropavlovsk
8. Edinburgh Investment Trust
9. Arrow Global Group
10. Vectura Group¹

​Note that these stocks are not listed in any particular order, they are simply some of the more popular choices in the UK, measured by trading volume.

Thomas Cook Group (£219.47 million)

Thomas Cook Group is a travel company founded in 1841, which currently boasts 19 million customers. At the end of September 2018, Thomas Cook reported more than £9 billion in revenue and a profit of £163 million.

Shareholders have been keeping a keen eye on the company’s growth, which has been consistent year on year. Dividends were paid out in 2016 and 2017, and it also hired a restructuring specialist to help reduce its debt. On the other hand, Thomas Cook’s bottom line has been impacted by stiff competition and profit warnings over the past years. Recent efforts to stabilise its financials include shutting down 21 of its stores, cutting 150 roles and reviewing its ‘Thomas Cook Money’ division. If and how these changes will affect share price growth remains to be seen, which is why Thomas Cook Group stocks are closely watched by traders and investors.

Petra Diamonds Ltd (£188.64 million)

Petra Diamonds Ltd is a mining company headquartered in the UK, founded in 1997 and listed on the main market of the London Stock Exchange (LSE) in 2005. The business posted revenue of close to half a billion pounds at the end of June 2018 with a profit of £203 million.

Petra Diamonds shares reached 220p in July 2014 after it released its positive interim results and recovered a 122.5 carat blue diamond from one of its mines in South Africa. In April 2019, it sold a 209.9 carat diamond worth $15 million that was also recovered in South Africa. After the sale, the shares were up by 4.1%. However, the stock price has been notoriously volatile due to constant currency pressures, production fluctuations and changing macroeconomic environments. The volatility is an exciting prospect for many traders, which could translate to opportunities to profit in future.

EnQuest (£338.54 million)

EnQuest, formed in 2010, is known as the largest oil producer in the North Sea. Revenue of around £1.3 billion and a profit of just over £127 million keeps EnQuest on par with fellow small cap companies on the watchlist, though its market cap is larger.

Operations across the globe ensure a strong supply chain, and the share price is up more than 30% since March 2019. Yet, EnQuest is said to have major debt issues and reported production cuts following teething problems with one of its newer operational setups. With both positive and negative outcomes over the past few months, many traders are keen to see which way the stock price will turn.

AA (£310.43 million)

AA is one of the largest roadside assistance providers in the world and also one of the most shorted stocks in the UK. Founded in 1905 and listed in June 2014, AA has had some ups and down in the past few years. Revenue at the end of January 2019 was almost £1 billion, while profit was recorded at £42 million.

Investors are keeping their eyes on AA’s new technologies to see if it will have a positive impact on the share price. It already offers so much more than just road assistance – other services include car insurance, loans and motoring advice. In contrast, the business has been weighed down by disappointing performances since listing, with stock showing a steady decline since a high of 425p in March 2015. Dividends were also cut by around 60%.

Countrywide (£65.52 million)

At just more than £65 million, Countrywide has the smallest market cap on the list. It’s the UK’s largest property group, founded in 1986 and listed on the LSE in 2013. From the £679 million in revenue detailed at the end of December 2018, it made £218 million in profit.

Countrywide is on the stock to watch list due to its popularity among short-sellers. Ongoing price drops can be positive if you go short to trade the downtrend. Furthermore, its smaller market cap could mean that there is more room for growth. Unfortunately, it may take a while for the share price to recover after falling profit forecasts and an emergency cash call caused share prices to drop by 60% in August 2018.

Capital & Regional (£107.65 million)

The property management group founded in 1979, Capital & Regional, has not experienced many significant peaks and troughs in its share price over the past few years. It has remained somewhere between 45p and 65p since 2015. Revenue of £91 million and profit of £25.6 million was reported at the end of 2018.

Between 2003 and 2009, the property market was solid and Capital & Regional’s share price enjoyed a steady climb to £16.64. But then, it dropped down to 49p in January 2009 due to the market’s concern around the capital structure of ‘The Mall Fund’ in which Capital & Regional had a 24% stake. While its revenue growth looks great – increasing from £46 million to £91 million between 2014 and 2018, earnings per share (EPS) look dismal at just over 4p, down from around 15p in 2014.

Petropavlovsk (£307.85 million)

Petropavlovsk is a mining company, founded in 1994, that operates some of the largest gold mines in Russia. It made half a billion in revenue and £26 million in profit by the end of 2018, but it does seem like the company has piling debts.

Share prices are up following its production forecast and reduced spending outlook. Furthermore, the business has been focusing on repositioning itself to reflect what was happening in the gold industry as a whole. However, mining companies across the globe are seeing disappointing results and this could reflect in the Petropavlovsk share price in future. Changes in the business have traders and investors keeping a close eye on the stock.

Edinburgh Investment Trust (£581.21 million)

Edinburgh Investment Trust is an investment company founded in 1952. At the end of October 2018, revenue was nearing £53 million and it held nearly £50 million in profit.

Traders may want to keep watching the stock as Edinburgh shares were split in January 2019. The number of shares held by investors increased fivefold as a result of the split, while the share price was reduced to one-fifth of its prior amount – taking the shares from £8.20 to 163p. In other words, a shareholding’s value did not change – only the share price. There has been a slow but steady rise in price since then. However, some traders may be wary of the lower volatility since the division.

Arrow Global Group (£409.60 million)

Arrow Global Group, like AA, is also on the list of most shorted stocks in the UK. Founded in 2005, this banking company is one of the younger companies on the list. It reported revenue of over £361 million in December 2018, making a profit of nearly £30 million.

Between 2016 and 2017, Arrow Global Group saw a lot of buy-in from the public and the company doubled in value. And, since listing on the LSE in 2013, revenue has more than tripled – from £110.7 million in 2014 to £361.80 million in 2018. EPS increased from 10p to 17p over the same period.

But, many traders and investors are wary following the share price drop from 435p in January 2018 to 167p in December 2018. Fingers were pointed at the business’s new management and it was revealed that it was having trouble with its cash flow. With the potential for volatility, buyers and sellers are both watching the stock closely to see which way it will swing.

Vectura Group (£542.37 million)

Vectura Group is a UK-based pharmaceuticals company that was formed in 1997 and listed on the LSE in 2007. The most recent revenue as per the December 2018 income statement is £160.5 million, with profit capping £88 million.

Mergers and acquisitions (M&A), as well as changes in management, have provided lots of opportunity for short-term traders in terms of volatility. Unfortunately for stockholders and long-term traders, though, the share price has been on a down trend since 2016 – possibly due to increased research and development costs. Both groups will have to watch the stock closely to see if it will start rising or continue its current trend.

How to trade small cap stocks in the UK

To trade small cap stocks in the UK, you can open a CFD account. A CFD is a derivative product, meaning you don’t own the underlying asset – you simply speculate on whether its price will go up or down.

Here’s how you can trade small cap stocks in the UK:

1. Learn more about the stock market: you can learn about market capitalisation and test your knowledge on IG Academy
2. Create a trading plan: you can create your own, unique trading plan with the help of this guide
3. Open your account with IG: it only takes a few minutes to create a CFD trading account
4. Open and monitor your trades: place your first trade in seconds and then watch the market closely to find the best time to close your position

Sources

¹ LSE, 2019