Just released: our 3 top small-cap stocks to consider buying before March [PREMIUM PICKS]

Premium content from Motley Fool Hidden Winners UK

Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.

Why we like it: “The world of founder-led companies is among our favourite hunting grounds here at Hidden Winners. That’s because tenured management – with a significant stake in the business – often has cautious, long-term-oriented management principles. Partners Sam Bazini and Eoin Macleod – who combined own roughly 4-% of Warpaint London (LSE:W7L), evenly split – began their business careers selling cosmetics on market stalls. In 1992 they founded Warpaint, buying excess stock of cosmetics and fragrances from companies such as Revlon, and selling it on to discount retailers and wholesalers. While it was a nice business, the excess stock it was buying never included the most sought-after products, and to fill in the gaps and offer a complete cosmetics range to their growing customer base, the founders decided to create their own brand, W7.

“The key W7 brand – which focuses on the 16-34 age range – grew sales by 25% in the last six months and is responsible for around two-thirds of total sales. Its Technic brand – which focuses on the gifting market – grew by 34% in the same period and makes up about 32% of the sales pie. The company reckons that the key to its growth is expanding its presence into large retailers globally, growing sales with existing customers, while attracting new customers and growing its online presence. The business is both profitable and cash generative, with an exceptional recent and longer-term track record, and we’re given confidence that the owners/managers will steward the business (and their own investments) in a way that maximises long-term potential while avoiding catastrophic risk-taking.”

Why we like it now: Warpaint’s recent trading update was disappointing, with sales of £102m and profits of £24m falling slightly behind expectations of £105m and £24m respectively, but the share price fall looks potentially overdone. The market’s concerned that its growth rates aren’t sustainable – and if the trend of missed forecasts continues, that would be a worry – but the company boasts an exceptional longer track record of profit growth and could offer good value if its performance recovers. Warpaint is set to raise prices in 2025 and will benefit from the increasing scale of orders placed with suppliers as the business grows – potentially helping gross margins expand for a fifth consecutive year. Its strategy is “growing profitable sales of its branded products globally, while increasing overall margins” remains attractive in our view.