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Investing in small-cap stocks often comes with added risk. The upside of buying smaller companies like these is the possibility for spectacular capital growth. On the downside, these businesses can be more vulnerable to economic shocks than larger businesses.
Buying small caps that trade on lower price-to-earnings (P/E) ratios can greatly reduce the danger. With low valuations, it can be argued that their higher risk profiles are baked into the share price, potentially limiting price falls on disappointing company-, industry-, or economic-related news.
With this in mind, here are two top UK shares that demand serious attention at current prices.
Macfarlane Group
As a major packaging supplier, Macfarlane Group (LSE:MACF) has serious long-term growth potential as online shopping continues to grow.
The business doesn’t just produce bog-standard cardboard boxes. It supplies tailored packaging solutions for different clients, requiring a level of technical expertise that allows it to succeed in what’s a highly competitive market.
According to its website, the small cap’s processes include “utilising 3D design software and rigorous application testing methods” to ensure than high value products are well protected. This builds a level of trust in markets like electronics, aerospace, and healthcare that helps it to continue winning business.
City analysts expect Macfarlane’s annual earnings per share (EPS) to rise 24% in 2025, speeding up from 3% last year. This leaves the company trading on a rock-bottom forward P/E ratio, of 9.4 times.
However, this isn’t the only impressive value metric it currently enjoys.
That rapid surge in profits that’s predicted also means Macfarlane trades on a corresponding P/E-to-growth (PEG) multiple of 0.4. Any reading below one implies that a stock is undervalued.
As I say, Macfarlane does face significant competitive pressures that threaten sales and margins. Its operations are also highly cyclical. But at current prices I still think it’s worth serious consideration.
Topps Tiles
I believe this is also the case with Topps Tiles (LSE:TPT), whose profits can fall sharply during economic downturns. However, as a long-term investor there’s a lot I like here, and particularly its earnings prospects as the UK housing market improves.
Commanding around a fifth of the domestic tile market, the retailer’s well placed profit from this opportunity. Indeed, it’s also investing heavily to enhance its product ranges and boost its digital channel, a plan it thinks could add £100m to its sales column over the medium term.
Topps Tiles’ P/E ratio for this financial year (to September) is good if not spectacular. This comes in at 11.5 times.
But like Macfarlane, the business is tipped to deliver breakneck EPS growth over the short term. Annual rises of 40% and 43% are predicted for the next two financial years respectively, and so that earnings ratio plummets to 8.1 times for next year.
These impressive projections also result in more sub-1 PEG ratios (at 0.3 for 2025 and 0.2 for 2026).
With Topps shares also offering a 6% dividend yield for this year and 8% for next, it offers exceptional all-round value. Both of these small caps deserve serious consideration in my opinion.
