To beat the market, if often pays for investors to fish at the smaller end of the spectrum – meaning small cap stocks on the ASX.
Here’s two I’ve recently come across that look relatively cheap…
CMI Limited (ASX: CMI)
With a market cap of $53 million, CMI Limited manufactures and distributes electrical cables and components for the industrial and mining sectors. In an update to the market today, the company announced that it expects a net profit of $5.45 million, although that includes one-off contributions from the resolution of the CMI Industrial loan of $0.87 million and the divestment of the TJM business, resulting in a net gain of $0.47 million.
That result suggests a P/E ratio of 12.9 (excluding one-offs), which doesn’t appear too demanding.
Even better is that CMI is sitting on $30 million in cash and no debt and management have announced that it is considering all options to deliver value to shareholders, including acquisitions and/or capital management initiatives. That’s around 87 cents per share in cash, which could mean a special dividend or capital return for shareholders.
A bonus is that CMI is also paying a fully franked dividend yield of around 3.7%, or 5.3% when you including franking credits. It’s by no means risk-free, but the company is simpler and the cheap price is some compensation.
Vita Life Sciences Limited (ASX: VSC)
The vitamins and supplements supplier has seen its share price hammered earlier this month, after downgrading its full-year profit forecast. From sales of $40 million and earnings before interest and tax (EBIT) of $7.5 million, Vita Life Sciences expects to report sales of $38 million and EBIT of around $5.5 million.
The company blamed the falls on product regulation in China, poor performance in Thailand and start-up costs in Indonesia. Vita Life expects to pay an interim dividend of 1.5 cents when the company reports first-half results in late August, equating to an annualised dividend yield of 3.7% (unfranked).
At the time, shares tanked by 39% and looks to be overdone, given revenues should still be higher than the previous year.
While the result was disappointing, Vita Life Sciences appears cheap, trading on an estimated P/E ratio of around 9.6x. Bonuses include the aforementioned dividend yield, around $6 million in net cash and the imminent start-up in Indonesia.
CMI and Vita Life Sciences appear cheap for investors able to handle the risks. I’ll be keeping an eye on both of them.
Small caps can mean big returns. Here are another two small caps we think can do well...
Two of Australia’s most promising small companies are still flying under the radar. Discover these two exciting ASX investments in our brand-new special FREE report, “2 Small Cap Superstars”.
Click here now, it’s FREE!
What are you waiting for?
Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.