Smaller companies are often less secure than their large-cap counterparts, but investors who make the right calls can generate returns far in excess of some of the market’s largest companies. By looking at UK-listed companies with market capitalisations below £1bn, AJ Bell has identified a number of small-cap stocks whose share prices soared well above even the FTSE 100’s top performers in 2024.
These small-cap champions are few and far between, and investors can easily find themselves holding shares in a company that fails to launch, but the upside from picking wisely can provide a sizable uplift to portfolios. With 699 companies in the bottom 10% of the UK-listed market alone (worth a collective £252bn), the chance for error is high.
These companies on the Deutsche Numis Smaller Companies index can range anywhere from between £0.1m to £1.7bn, so the opportunity set is wide, but it often produces a series of stocks with supercharged returns each year.
Dan Coatsworth, investment analyst at AJ Bell, says: “Investors often look at the small-cap space in the hope of finding tomorrow’s next big thing. Mining, oil & gas and biotechs are often at the top of the list as discovering a new source of metals or fossil fuels, or creating a successful drug can trigger a surge in the share price.
“This is a high-risk strategy as success rates can be slim for companies in these sectors and they often need to raise money on a regular basis to keep the lights on while they continue their quest. Many companies come a cropper on this journey simply because they run out of money.
“Unsurprisingly, natural resources featured heavily in the list of best-performing small-cap stocks in 2024, but this sector is not for everyone. Many people prefer to back larger, profitable businesses in the hope of smoother returns. Small-cap stocks can be volatile and experience wild share price swings.”
Mystery movers
An acute eye and in-depth knowledge of smaller companies can help skilled investors seek out early winners, yet according to Coatsworth, “the small-cap space typically has one or two names whose shares surge for no apparent reason”. That was certainly the case for the best-performing small cap of 2024, Sealand Capital Galaxy.
Shares in the £68.9m company, which consolidates IT, social media and technology businesses, were up a whopping 1,140% last year. This soundly beats even the FTSE 100’s best performer of 2024, International Consolidated Airlines, which surged 96.4%.
Yet Sealand Capital Galaxy’s huge increase is a mystery even to itself. The company issued a statement in December after the spike in share price stating it “knows of no reason for this increase” as there “has been no material change in its trading or financial condition” since its latest interim results in September 2024.
Coatsworth was equally perplexed, saying: “Sealand Capital Galaxy generated a 1,140% return for shareholders despite seeing less revenue than a junior banker might receive for their annual bonus. An agreement to invest in an AI business towards the end of the year helped sustain momentum in the share price, and the stock has continued to shoot up so far in 2025.
Read the rest of the article, visit the February edition of Portfolio Adviser Magazine