Many serious investors like to search the small-cap universe in pursuit of under-researched companies that may offer superior returns. However, just because you're scanning the smaller end of the market doesn't mean the rules of successful investing change. You still need to find companies with healthy balance sheets alongside a history of revenue and profit growth.
Ideally, you'll also want to find a founder-led company as this commonly means a company is run for long-term success, rather than for the short-term benefit of management teams interested in their own wealth.
Fortunately, I know of a little know Queensland-based business that has seen its share price deliver healthy total returns to investors over the past 10 years and more.
So let's take a look at 5 reasons why dental aggregator 1300 Smiles Limited (ASX: ONT) could be a good buy for growth and income investors.
It's founder led – The managing director Dr Darryl Holmes is the major shareholder and founder having run the business on the ASX since its listing in 2005 and prior to that. A founder with a substantial part of their net wealth tied up in a business is almost a must when looking for small-cap investments.
Profit and earnings per share growth – as sure as night follows day, share prices will follow earnings per share higher or lower over the medium term. Fortunately, 1300 Smile has an excellent track record of delivering EPS growth thanks in part to the tailwinds supporting the business. In 2008 it delivered 11.7 cents in EPS compared to 30.7 in EPS in 2017. This goes to show how the company is growing organically and via a disciplined acquisition strategy that is not diluting shareholders or growing excess debt.
Balance sheet – The group has no bank debt and significant cash reserves, which reflects the managing director's conservative approach to running and growing the business.
Dividends – these are a core part of many smart investors' returns and 1300 Smiles has managed to increase its dividend in 9 out of the past 10 years. Impressive. Moreover, the trailing yield is healthy at 3.5% (plus the tax effective benefits of full franking credits) with 23 cents per share in dividends paid in fiscal 2017, against a current share price of $6.60.
Long growth runway – as a conservatively managed dental aggregator and operator the business has plenty of growth potential thanks to the increasing per capita spend Australians are likely to spend on dental visits over time. Revenue has more than doubled over 10 years and the management team is keenly aware of the benefits of growing profit margins and shareholder returns.
Valuation – At $6.60 the group trades on 21x trailing earnings of 30.7 cents per share. Given the opportunity to beat that in fiscal 2018 and a decent growth outlook for a high-quality company, 1300 Smiles looks reasonable value.
You can't ask for much more than the above as a share market investor, although there are other stocks well worth knowing about if you're serious about growing your wealth…..
