The US stock market has become increasingly dominated by mega-cap giants over recent years. But that’s not to say the market is short of quality companies.
The prospect of a change of government has left investors wondering whether smaller companies in America have been overlooked.
Here are three share ideas we think are worthy of consideration.
Remember, before you can trade US shares, you need to complete and return a W-8BEN form.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Remember, smaller companies are higher-risk investments and as with any investment can rise and fall in value, so you could get back less than you invest.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
A fund manager's view on what's next for smaller companies
Centrus Energy
Centrus Energy supplies fuel and services for the nuclear power industry.
It’s one of just two companies in the US capable of enriching uranium – a process that prepares mined uranium for use in reactors. This makes Centrus a critical player as energy producers shift towards providing affordable and lower-carbon electricity.
Looking ahead, we think the demand outlook for nuclear energy is good. Many governments around the world are turning to nuclear to meet their clean-energy needs, and as a result, attitudes and policies toward it are becoming more supportive. That’s helping to underpin the group’s long-term order book, which currently stretches out to 2030.
Centrus has also secured government funding to further develop and commercialise its next-generation nuclear fuel called HALEU.
Early production results have been impressive, and this could help drive significant growth in the future. But it’s a long road, and of course, there are no guarantees.
Operating profits are expected to rise from $29.9mn this year to $51.7mn by 2026. But the group will need to keep investing in research and development, and many of its contracts are based on annual purchase commitments. This means cash flows can be lumpy, so we’d encourage investors to take a long-term view and expect some ups and downs along the way.
Dynavax Technologies
Dynavax is a pharmaceutical company focused on vaccines.
It currently generates nearly all of its revenue from HEPLISAV-B, a vaccine for hepatitis B, which has significant dosing advantages over the competition.
That’s seen it gain around 44% market share since US approval back in 2017, with plenty of opportunity to gain a bigger slice of a growing pie.
Momentum is strong, with sales up 27% in the third quarter to $79mn, while relatively stable costs saw operating profit nearly double to $10mn.
Dynavax looks some way from bringing additional products to market, but it’s running a handful of other vaccine trials using its novel technology. There’s no promise that the company’s products will reach their full potential.
It doesn’t have the same sales and marketing power as its larger competitors, and it doesn’t have the same diversity in its pipeline. So, while all companies in the sector face a high risk of clinical failure, it’s more acute at the smaller end.
Overall, we’re optimistic about the opportunities for this small, but well-formed, company.
It has lots of cash to play with, which gives Dynavax options to expand its research program and fund the recently announced $200mn share buyback. But while the balance sheet helps to support a fairly forward-looking valuation, it doesn’t mean it won’t be vulnerable to disappointments and no shareholder returns are guaranteed.
Insight Enterprises
Insight Enterprises has transformed from a simple IT equipment reseller into a key partner for businesses managing their technology needs.
As companies face more complex IT challenges, Insight acts as a partner to its clients, simplifying the process of selecting, integrating, and managing technology to support their operations.
In 2022, Insight shifted its focus to prioritise client needs, moving away from one-off projects and product sourcing. This change is already starting to pay off, with its services now making up 57% of its profits, compared to 51% in mid-2022.
The company has also grown through acquisitions, like its 2023 purchase of SADA, which helps businesses use Google Cloud. With most of its clients still relying heavily on older, in-house systems, Insight has a strong opportunity to support the move to cloud-based systems.
For investors, Insight represents a chance to benefit from the growing demand for modern IT services. The IT and software sector has been through a tricky patch with overspending during the pandemic years, leading to a pullback more recently. However, we think the current outlook is more positive, and Insight is well-placed to benefit.
There are risks, though. The company’s reliance on major partners like Microsoft creates uncertainty if terms change. Plus, that recent pullback in IT spending and delays in replacing older equipment has already hurt performance this year.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
