Recent share price falls do not reflect the long-term potential of these two small-cap stocks

·4-min read
Two people with money_tax #3 (3).jpg
Two people with money_tax #3 (3).jpg

Hindsight can be an investor’s worst enemy. It continually highlights mistakes, in terms of which stocks should have been purchased and the timing of previous transactions.

Worse still, it can suggest that wholly unpredictable events were entirely foreseeable prior to their occurrence. For example, rising interest rates were widely expected to benefit the banking sector because of their positive impact on profitability. However, they have contributed to severe industry woes and weak investor confidence.

Of course, no investor can know exactly what will happen in future. Therefore, unless it highlights a severely flawed investment strategy, such as failing to check company fundamentals, hindsight should be taken with a pinch of salt.

Indeed, several holdings in Questor’s inheritance tax (IHT) portfolio have fallen dramatically in value over recent months. Hindsight would suggest they should have been sold prior to their declines, but in reality they are sound companies with long-term growth potential that have been negatively affected by unforeseeable weak investor sentiment towards small caps.

Tristel’s share price, for example, has slumped by 17pc since the start of the year. However, the supplier of disinfectant products to hospitals released upbeat half-year results last month that showed it is making encouraging progress.

Underlying revenue increased by 21pc year on year, with three quarters of sales growth relating to higher volumes and the remainder to price rises. Despite extreme inflation, the company was able to marginally increase its gross profit margin by one percentage point to 81pc. It also entered the North American market for the first time.

Following the release of its interim results, the company announced that it has submitted extra data requested by the US Food and Drug Administration (FDA) regarding its Duo ULT high-level disinfectant. This is the final part of a five-year journey as it seeks to gain FDA approval for use of the disinfectant on intra-cavity ultrasound probes.

Disinfection of ultrasound probes and transducers accounts for 40pc of the company’s worldwide revenue. Since the US is the largest ultrasound market in the world, FDA approval could have a positive impact on Tristel’s future financial performance. The FDA is expected to announce its decision by the end of June.

With a solid balance sheet and sound recent financial performance, the company continues to offer long-term investment appeal. Although it trades on a rich forward price-to-earnings ratio of around 33, this column believes it has more room to run following its 32pc capital gain since being added to our IHT portfolio in December 2018. Hold.

Questor says: hold

Ticker: TSTL

Share price at close: 325p

Update: Blancco

Blancco, another IHT portfolio holding, has also fallen heavily over recent months as investor sentiment towards smaller companies has weakened. The software deletion specialist’s shares are down 15pc over the past year but the company nevertheless released positive half-year results last month that indicate a recovery is ahead.

Revenue increased by 16pc year on year, with all of its main geographical regions growing at a double-digit rate despite ongoing economic uncertainty. Its adjusted operating profit margin increased slightly to 21pc from 20pc in the comparable period despite high inflation prompting cost rises.

Its balance sheet remains sound, with net finance costs covered 45 times by adjusted operating profit during the first half of the year. This suggests it has the capacity to make further acquisitions following last year’s purchase and successful integration of US-based erasure specialist WipeDrive.

Blancco’s organic growth prospects remain bright, with environmental concerns likely to prompt a growing proportion of companies to use data erasure services, as opposed to landfill, for redundant equipment. And with regulatory changes such as the EU’s GDPR legislation imposing large penalties on businesses that fail to protect personal data, demand for the company’s services is likely to rise.

Trading on a forward price-to-earnings ratio of around 23, the company’s shares are by no means cheap despite their recent fall. Furthermore, they have posted an 8pc decline since being added to our IHT portfolio in December 2020.

However, with encouraging half-year results and clear long-term growth catalysts, the company offers attractive capital growth potential over the coming years. Hold.

Questor says: hold

Ticker: BLTG

Share price at close: 187p

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