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: “Bloomsbury (LSE: BMY) owns the print rights for the Harry Potter books in the UK, and remarkably, the first book in the magical wizard series is the third-bestselling children’s book of this year, some 26 years after it was first published. Talk about valuable intellectual property! The company is also nurturing star author Sarah J Maas, publishing 15 titles so far by the popular fantasy novelist, whose catalogue of titles saw a whopping 51% rise in sales in the last year.

“But while strong sales of consumer titles are welcome, its non-consumer division – representing roughly 37% of total sales last year – could provide a substantial long-term growth driver. The company has transformed into a serious player in education in recent years. Through its digital platform – Bloomsbury Digital Resources (BDR) – the company provides educational resources to academic libraries and institutions. Bloomsbury expects that BDR should achieve organic sales growth of around 40% by 2027/28 – and it also represents a tantalising margin opportunity, in our view.”

Why we like it now: Bloomsbury recently reassured investors that trading in the four months to the end of June was in line with recently upgraded expectations. The company is expected to enjoy sales and profits for the full year of £319m and £37.6m respectively. While the company is unlikely to keep upgrading forecasts, and we make no promises of short-term gains, in the long-run I still reckon the company is underappreciated by investors. The company’s consumer division is likely to benefit further from “publishing phenomenon” Sarah J Maas, as it has six more books under contract, and these titles should benefit from word of mouth and recommendations on social media platforms. Readers tend to stay loyal to their favourite writers, and I reckon the tailwind from recent bumper sales will persist as more readers begin to appreciate Maas and subsequently seek out her entire catalogue.

A quick note on diversification: investors who have benefited from strong gains in the past from Bloomsbury might wish to avoid adding to their position, as being overly concentrated in any one company can be risky. As a general rule, we suggest that members build up a small-cap portfolio of at least 15 shares, spread over a number of different industries, to avoid being too concentrated in just a few positions. This might make up part of a wider portfolio eventually consisting of 25-30 companies, also including mid and large-cap companies.