5 cheap quality small cap stocks for 2017

With fund managers forecasting a dip in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) of around 5% over the next 12 months, maybe it’s time for investors to look outside the usual top 20 stocks for investment ideas.

These five companies could certainly fit the bill.

Company Market Cap Share price Net debt / equity ROE P/E

2 years

Vita Group Limited (ASX: VTG) 506.1 3.23 -13% 65.0% 11.2x
Nick Scali Limited (ASX: NCK) 455.2 5.62 -28% 50.3% 14.8x
Retail Food Group Limited (ASX: RFG) 1,133.8 6.42 44% 14.6% 12.4x
Paragon Care Ltd. (ASX: PGC) 144.8 0.88 26% 16.1% 12.6x
Servcorp Limited (ASX: SRV) 756.0 7.685 -38% 15.8% 13.7x

Source: S&P Global Markets Intelligence, Yahoo Finance

I’ve highlighted a number of financial ratios in the table above which show that these five companies generate high returns on equity, and Vita Group, Nick Scali and Servcorp do that even with cash balances and no net debt. It also shows that the expected earnings in two years’ time – for most that is the 2018 financial year – puts them all on P/E ratios of less than 15x.

For companies that are generating strong earnings per share growth, that indeed appears a low price to pay.

Vita Group, the operator of 103 Telstra retail stores, has seen its share price crash from a 52-week high of $5.47 set just two months ago and is trading near three-month lows.

Nick Scali, the furniture retailer, is not far off its all-time high of $6.11, set in August 2016.

Retail Food Group owns several brands including Gloria Jeans, Brumby’s Bakery, Donut King, Crust Gourmet Pizza and Pizza Capers. The franchisor is forecasting net profit growth of 20% this financial year, and yet it still trades at a relatively low P/E ratio.

Paragon Care is a distributor of medical and specialist equipment, and may look expensive on a current P/E ratio of 19.3x, but there is strong growth factored into earnings in FY18 for a P/E ratio of just 12.6x.

Servcorp owns and operates serviced offices in multiple buildings across loads of cities in many countries around the world. Strong growth, a decent dividend, high quality management and $100 million of cash in the bank make Servcorp a solid pick with a P/E of just 13.7x.

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Motley Fool contributor Mike King owns shares of Vita Group Ltd. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia owns shares of Retail Food Group Limited. 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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