Are these ‘hidden gems’ set for stardom?

Bilaal Mohamed discovers two smaller firms that could be set for stardom in the coming years.

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Today I’ll be revealing the names of two smaller firms that could be set for stardom in the coming years. Is the growth potential offered by these ‘hidden gems’ simply too good to miss, or should investors stick to buying large-cap stocks instead?

Plenty more to come

Designer footwear firm Jimmy Choo (LSE: CHOO) is a relative newcomer to the stock market launching in London in October 2014 at 140p with a market capitalisation of £546m. In the two years since, the company has seen its shares rise to 181p in the summer of 2015, before embarking on a year-long slide down to an all-time low of just 96p in June. I wrote in August that Jimmy Choo looked good value and the market didn’t disappoint, with the shares rising 26% since my article was published. So is it too late for new investors to buy, or is there more to come from this growing British brand?

In its half-year update, the luxury retailer reported a dip in pre-tax profits as a result of higher financing costs, but perhaps more importantly both revenue and operating profits were on the increase. The latter increased by a massive 43% to £25.3m, compared to £17.7m reported for the first half of 2015, with revenue up from £158.5m to £173.1m over the same period. I see the figures as encouraging and remain deeply optimistic over the company’s prospects.

The City seems to agree, with analysts in the Square Mile expecting the small-cap firm to post a 28% rise in underlying earnings for the full year to the end of December, with an equally impressive 25% improvement pencilled-in for next year. The shares trade on 22 times forecast earnings for the current year, falling to 17 times for 2017, which for me still represents good value given the rosy outlook.

There’s still Hope

Breedon Group (LSE: BREE) is the largest independent construction materials group in the UK, and remains one of the big players on the Alternative Investment Market (AIM). The company formerly known as Breedon Aggregates has gone from strength to strength in recent years with pre-tax profits ballooning from just £1.39m in 2011, to £31.28m last year. The company changed its name to Breedon Group after the acquisition of Hope Construction Materials Limited in August this year.

Interim results for the Derby-based group didn’t disappoint, with the company reporting a 19% rise in pre-tax profits for the first six months of the year to £20.9m, with revenues growing to £163m from £160.5m a year earlier. Breedon has a strong balance sheet with a record of strong cash generation in challenging markets and continues to seek out potential bolt-on acquisitions.

Market consensus suggests continued growth for the firm, with a 9% rise in earnings predicted for the full year to the end of December, followed by an even better 27% improvement anticipated for 2017. Breedon trades on a forward price-to-earnings ratio of 19 for 2017, a much lower rating than in recent years, and in my opinion offers growth at a very reasonable price.

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.

Bilaal Mohamed 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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