To beat the market, if often pays for investors to fish at the smaller end of the spectrum – meaning small cap stocks on the ASX.
Here's two I've recently come across that look relatively cheap…
CMI Limited (ASX: CMI)
With a market cap of $53 million, CMI Limited manufactures and distributes electrical cables and components for the industrial and mining sectors. In an update to the market today, the company announced that it expects a net profit of $5.45 million, although that includes one-off contributions from the resolution of the CMI Industrial loan of $0.87 million and the divestment of the TJM business, resulting in a net gain of $0.47 million.
That result suggests a P/E ratio of 12.9 (excluding one-offs), which doesn't appear too demanding.
Even better is that CMI is sitting on $30 million in cash and no debt and management have announced that it is considering all options to deliver value to shareholders, including acquisitions and/or capital management initiatives. That's around 87 cents per share in cash, which could mean a special dividend or capital return for shareholders.
A bonus is that CMI is also paying a fully franked dividend yield of around 3.7%, or 5.3% when you including franking credits. It's by no means risk-free, but the company is simpler and the cheap price is some compensation.
Vita Life Sciences Limited (ASX: VSC)
The vitamins and supplements supplier has seen its share price hammered earlier this month, after downgrading its full-year profit forecast. From sales of $40 million and earnings before interest and tax (EBIT) of $7.5 million, Vita Life Sciences expects to report sales of $38 million and EBIT of around $5.5 million.
The company blamed the falls on product regulation in China, poor performance in Thailand and start-up costs in Indonesia. Vita Life expects to pay an interim dividend of 1.5 cents when the company reports first-half results in late August, equating to an annualised dividend yield of 3.7% (unfranked).
At the time, shares tanked by 39% and looks to be overdone, given revenues should still be higher than the previous year.
While the result was disappointing, Vita Life Sciences appears cheap, trading on an estimated P/E ratio of around 9.6x. Bonuses include the aforementioned dividend yield, around $6 million in net cash and the imminent start-up in Indonesia.
Foolish takeaway
CMI and Vita Life Sciences appear cheap for investors able to handle the risks. I'll be keeping an eye on both of them.
