Three UK Small Caps With Momentum: Warpaint, Raspberry Pi, and Yü Group

The UK stock market is a treasure trove of overlooked opportunities, particularly among smaller companies operating in high-growth sectors. Three names—Warpaint London (LSE:WPL), Raspberry Pi (LSE:RPI), and Yü Group (LSE:YUG)—stand out for their strong fundamentals, exposure to tailwinds in cosmetics, tech, and energy, and what appear to be undervalued metrics. Let's break down why these could be compelling picks.

Warpaint London: Cosmetics Innovation With Global Reach

Warpaint London, a cosmetics supplier with a focus on affordable, inclusive beauty, has delivered 13% revenue growth to £101.6 million in 2024, driven by expansion in the U.S., EU, and its direct-to-consumer (DTC) channel. The company's margin expansion (gross profit margin up 130 basis points to 41.2%) highlights operational efficiency, while its cash-rich balance sheet (£21.9 million in cash, no debt) leaves room for further acquisitions or dividends.

Growth Drivers:
- U.S. Market Penetration: Walmart's adoption of W7 and Chit Chat products, alongside expansions at CVS (918 stores by August 2025), signals strong momentum.
- Acquisition Synergy: The February 2025 acquisition of Brand Architekts (brands like Skin & Tan) is expected to be earnings-enhancing in 2025, broadening its product portfolio.
- E-commerce Surge: DTC sales rose 35% to £8.4 million in 2024, now 8% of total revenue—a channel with clear upside.

Valuation: With a P/E ratio of 18x (based on 2024 earnings of £24.6 million) and a P/S ratio of 1.2x, Warpaint trades at a discount compared to peers like L'Oréal. The board's confidence is reflected in a 22% dividend hike to 11p per share.

Raspberry Pi: Tech Dominance Amid Volatility

While technically a mid-cap (market cap: £887 million), Raspberry Pi's strategic moves into industrial markets and new product cycles make it a compelling play. Despite a 2% revenue dip in 2024 to £192.98 million, the company is positioning for long-term growth through:
- Industrial Expansion: Partnerships with global OEMs and the launch of the Raspberry Pi Pico 2 microcontroller (targeting IoT and robotics) open high-margin opportunities.
- Zero Debt: A clean balance sheet (debt/equity ratio of 0%) offers flexibility.

Risks:
- High Valuation: A P/E ratio of 101.9x and insider selling (notably a £1.8 million stake sale by a founder in June) raise concerns about overvaluation.
- Margin Pressure: Net profit margins fell to 4.5% in 2024 from 11.9% in 2023, though this may reflect short-term costs of scaling industrial operations.

Investment Thesis: While volatile, Raspberry Pi's 30% annual earnings growth forecast (driven by industrial IoT) could justify its premium if execution delivers. Investors should focus on long-term potential, not short-term dips.

Yü Group: Energy Solutions Riding Renewables' Wave

Yü Group, a small-cap utility firm (market cap: £278 million in 2024), is a play on the UK's energy transition. It reported 40% revenue growth to £645.5 million in 2024, fueled by smart meter installations and green energy contracts. Key positives:
- Smart Meter Growth: 22,900 installations in 2024, with plans to exceed 60,000 by 2025, generating recurring revenue via index-linked annualized contracts (ILARR).
- Renewables Alignment: Partnerships like Shell's hedging benefits and Yü Smart's carbon-neutral gas offerings align with Labour's push for onshore wind and green hydrogen.

Valuation: Trading at a P/E of 33x (based on 2024 profits of £44.5 million) and a P/S ratio of 0.4x, Yü appears undervalued given its £80.2 million net cash and 2025 revenue guidance of £730–760 million.

Investment Recommendations

1. Warpaint London: A buy at current levels. Its diversified geographic growth, margin upside, and strong cash flow make it a low-risk, high-reward bet.
2. Raspberry Pi: A hold with a long view. The high valuation and insider selling warrant caution, but its industrial pivot could pay off for patient investors.
3. Yü Group: A buy for exposure to renewables and smart energy infrastructure. Its cash-rich balance sheet and alignment with UK policy tailwinds are compelling.

Final Take

These three companies exemplify the UK's hidden gems in high-growth sectors. While risks exist—valuations, execution, and regulatory shifts—they offer asymmetric upside for investors willing to look beyond the FTSE 100. Warpaint and Yü, in particular, combine solid fundamentals with undervalued metrics, making them prime candidates for portfolio diversification.

Disclosure: This analysis is for informational purposes only. Always conduct your own research or consult a financial advisor before making investment decisions.