As someone with a fairly high tolerance for risk, I like searching for cheap UK shares in the small-cap space. Theoretically, these companies have the potential to grow at a faster clip than a typical FTSE 100 stock, thereby generating better (possibly great) returns for holders. It’s not guaranteed, of course, but the chances of this happening improve when they’re picked up at a decent price.
I think floor coverings distributor Headlam (LSE: HEAD) might fit the bill of being a cheap UK share. Sure, this is hardly exciting stuff. However, it’s a market leader at what it does and one that seems to be coming through the other end of the Covid-19 storm in good shape.
Today, the company announced it had seen a “strong recovery” in trading. Total revenue of just under £330m over the first six months of 2021 is close to what the company achieved in the same period in 2019. Clearly, it’s also far ahead of last year (£227.2m).
As one might expect, this rebound was good news for underlying pre-tax profit at Headlam. This came in at £16.7m — a huge contrast to the £1.8m loss reported for the first half of 2020.
I reckon this momentum will continue. While activity in the commercial sector remains “subdued“, HEAD has still been trading in line with recently-upgraded expectations in the last few months. It’s also been able to maintain inventory levels despite issues with its supply chain. The resumption of normal dividend payments faster than thought also gives me confidence.
Sure, Headlam isn’t risk-free. A rebound in Covid-19 infection levels would be less than ideal as the company goes into its traditionally busiest part of the year trading-wise. The share price performance hasn’t been magnificent either. While up 63% over the last year, the stock is still only 10% above where it was five years ago. So, I wouldn’t expect massive gains (like those seen at this FTSE 250 firm) any time soon.
Still, a valuation of 16 times earnings, reducing to 13 next year based on analyst projections make this a potentially good deal for me.
Another small-cap stock that could prove a good long-term buy for me is automotive testing firm AB Dynamics (LSE: ABDP). That’s despite the company’s share price falling 22% in 2021 so far, including a 6% fall today.
At least some of this is due to trading still being stodgy in the wake of the pandemic. Recent news that founder Anthony Best has taken retirement hasn’t gone down well either. He does, after all, own over a quarter of the company’s stock and may be inclined to begin selling.
As a holder already, I can’t say I’ve been over the moon about all this. Moreover, this is unlikely to be regarded as a cheap UK share for anyone with a short investing horizon.
However, the fact that this company works with 25 major car manufacturers around the world speaks volumes. I struggle to think why the demand for its services won’t rapidly increase in the years ahead with the advent of autonomous driving. In addition to this, AB is also financially sound. So, not a cheap UK share in the traditional sense, but increasingly good value based on potential growth.
If anything, I think now could be a time for me to top up my holding.
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Paul Summers owns shares in AB Dynamics. The Motley Fool UK has recommended AB Dynamics. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.