2 secret growth stocks to watch in 2017

These under-the-radar stocks leapt more than 40% last year and I reckon they can do it again in 2017.

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Here at the Motley Fool constantly preach that some of the best growth stocks to be found are often relatively boring and unknown small caps that most investors never think to look at twice. Of course, for those of us willing to dig through the thousands of small caps out there, that means there are plenty of gems just waiting to be discovered.

A popular proposition

One such diamond in the rough is £200m market cap maker of gaming machines Quixant (LSE: QXT). Quixant designs, manufactures and sells the hardware and software for casino gaming products such as slot machines. This has been big business for Quixant and since going public in 2013 revenue has more than doubled, sending its share price up over 345%.

The key to Quixant’s growth has been offering major game machine makers high-end, integrated hardware and software at an unbeatable price point. This is, unsurprisingly, a popular proposition for customers and Quixant has been quickly increasing its market share. In the latest half-year results gaming division revenues jumped 56% year-on-year due to a deepening relationship with its largest customer and new work from secondary clients.

There’s little reason for this growth to slow down as the industry gradually consolidates and Quixant offers the added appeal of beginning to sell the touch screen monitors that go alongside gaming machines. This diversification was achieved with the £7.6m purchase of monitor maker Densitron in late 2015 and is already showing results.

Quixant shares are pricey at 25 times forward earnings, but the company offers many qualities investors should love: a healthy balance sheet, solid EBITDA margins of 14.5%, fast growing sales and a founder-led management team that owns roughly 30% of the company.

Reason to be excited

Another relatively unknown company that deserves more attention is marine services provider James Fisher and Sons (LSE: FSJ). Shares of the company are up over 200% in the past five years, as organic growth and acquisitions have cemented the company’s leadership in a bevy of niche markets. These markets cover everything from hull stress monitoring to ship-to-ship transfers and remote inspection systems for nuclear facilities.

Branching out into a variety of business lines makes considerable sense for James Fisher, as the company’s high reputation and decades of industry knowledge reassure customers who always need dependable, high-quality suppliers. The benefits of this diversified business model are apparent in the company’s latest half year results to June, in which revenue and profits remained broadly level despite a 25% drop in revenue from the important offshore oil & gas segment, thanks to the challenging industry environment.

At 21 times forward earnings a lot of growth is already baked into share prices, but I still see reason to be excited about James Fisher’s future. The company’s balance sheet is in good health with net debt to EBITDA ratio of only 1.8x at the end of June providing firepower for further bolt-on acquisitions. Organic growth prospects are also quite rosy as the company moves into fast growing regions of the world. With a laser-like focus on cash generation and return on capital, a long history of growth and a diversified business model James Fisher and Sons is just the type of dependable small cap that investors of all stripes should take a closer look at.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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