Leading broker rates these 4 small-cap shares a BUY

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Broker recommendations can often be a good starting point for investors looking for new investment ideas or even for some extra analysis on a particular stock.

While its obvious that brokers don’t always get it right and can sometimes have conflicting interests, they can nevertheless be a good source of information for investors.

With that in mind, here is a selection of small cap stocks identified by Bell Potter that it believes are currently undervalued:

  • Adacel Technologies Limited (ASX: ADA) – Adacel is a leading provider of simulation, training and control systems for the civil and defence aviation sectors. The company has upgraded its earnings on a number of occasions over the past two years and Bell Potter is forecasting strong double-digit growth in pre-tax profit of 78% in FY16 and 18% in both FY17 and FY18. The broker expects the company to benefit from new product launches and expansion into new territories and has a 12-month price target of $2.75.
  • Webjet Limited (ASX: WEB) – Shares of the online travel agent have already enjoyed a stellar 12 months, rising more than 73%. Despite this, the broker still believes there could be further gains to be made on the basis that it is undervalued compared to its global peers. Webjet enjoys strong brand recognition within Australia and is also expanding into international markets with its B2B hotel business. Bell Potter has a 12-month price target of $6.76.
  • Mcgrath Ltd (ASX: MEA) – Many investors were sceptical about the timing of McGrath’s IPO with the company cutting its prospectus forecast just five months after listing. A slowing Sydney property market and a poorly performing acquisition were to blame, but Bell Potter still believes the shares are significantly undervalued. The broker was one of the lead managers of the McGrath IPO back in December 2015 so it’s not surprising to see they have maintained a buy rating on the real estate business. Despite cutting their EPS forecasts in FY16, FY17 and FY18 by 15%, 25% and 24% respectively, the broker has a 12-month price target of $1.50.
  • Mayne Pharma Group Ltd (ASX: MYX) – Mayne Pharma has added a number of important molecules to its portfolio over the past 18 months and this has resulted in a dramatic increase in revenues and profits. Bell Potter is forecasting earnings per share growth of 133% for FY16 before slowing to just 7% in FY17. Despite this, the broker remains confident the generic drug company can continue to bring new molecules to market especially in the US where the company currently generates 88% of its revenues. Bell Potter has a 12-month price target of $1.76.

Foolish takeaway

The price targets set by Bell Potter for the four stocks above seems quite generous and I personally would not buy any of those stocks right now.

It is important for investors to remember that broker recommendations can be useful, but they are not a substitute for an investor’s own research, analysis and valuation.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. 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.

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