Undiscovered treasures are small industrial stocks in the UK

Three of the British small-cap industrial stocks that Ed Wielechowski of the Odyssean Investment Trust recommends are highlighted

Our goal at Odyssean Investment Trust is to invest in reputable UK companies that are undervalued and have room to increase in value through proactive management. The British small-cap industrials are an unglamorous segment of the market where we have recently been active.

The industrial sector in the United Kingdom is neglected and unloved. Investors frequently associate "industrials" with dirty metal gusslers who work in a declining manufacturing sector. In reality, this industry is very varied, and for those who are willing to search, there are many excellent, internationally oriented companies with promising growth opportunities.

Three essential qualities are what we search for in industrials to identify the gems. First, the most appealing businesses use their own intellectual property in their manufacturing processes or products, which enables them to dominate a particular market globally. Every investment is supported by a substantial economic moat created by expertise that is difficult to duplicate.

Second, even though the industrial sector is subject to cyclical fluctuations, many businesses benefit from exposure to long-term growth megatrends like investments in AI, renewable energy, or the rising demand for healthcare. Longer-term secular stories can frequently be concealed by short-term fluctuations, providing the patient investor with an opportunity.

Lastly, industrial businesses can be complex: it's difficult to manage production, continuous research and development (R&D), and a changing demand environment. Supporting seasoned, experienced teams is essential, and high-quality management can add substantial value.

Profits are being driven by three British industrial stocks.

Our criteria are well-fitted by XP Power (LSE: XPP). Leading power supply designers and manufacturers, the company serves high-tech applications in semiconductor, industrial, and healthcare end markets. It creates power supplies that satisfy the requirements of the most demanding situations by utilizing its industry-leading expertise.

Due to the current geopolitical and artificial intelligence demand drivers, the group has a strong track record throughout the cycle and benefits from the growing demand for semiconductor manufacturing capacity. This stock's long-term potential is being overlooked by the market, despite being led by a proven team that has provided strong operational control during the recent cyclical downturn.

A new industrials champion in the UK is Xaar (LSE: XAR). The business produces inkjet printheads with a special technology that enables the precise deposition of fluids with high viscosity for a variety of industrial uses. The group's print heads, which are the main part of its customers' printing machines and are sold all over the world, are based on intellectual property that has been developed over many years.

The company operates in several industries, but recently, under the direction of its current leader, it has leveraged the special capabilities of its technology to enter markets that ink-jet deposition solutions were not previously able to penetrate. Regardless of short-term market cycles, these new opportunities provide a path to long-term growth and, in our opinion, portend an exciting future for the business.

Dialight (LSE: DIA), a premium supplier of LED lights for use in dangerous industrial settings, is another UK-based company with a specialized, worldwide leadership position. Because of its design experience, the group is able to provide industry-leading reliability, which is essential for the extreme, specialized use cases it supports.

Because LED lighting is more dependable and uses less power than traditional alternatives, it continues to gain market share, giving the company a boost in growth throughout economic cycles. In recent years, Dialight has recovered from a difficult time under a new leadership team that has demonstrated success in increasing value at industrial companies. In our opinion, it is yet another gem among small-cap industrials in the UK.