Are these small-cap stocks set to soar?

Small-cap shares have performed well in the last year. Are these two on your radar?

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UK small-caps have performed well in the last 12 months, with the FTSE AIM 100 index returning 18.3% including dividends compared to the FTSE 100’s 14.7%. Here’s a look at two AIM small-cap stocks that have done well in the last few years and that I believe have strong potential.

dotDigital Group

Do you ever receive emails from retailers advertising their promotions and sales? I do and I have to admit, they’re quite effective at getting my attention. That’s why I like dotDigital Group(LSE: DOTD), a leader in the digital marketing space. Its key product Dotmailer enables firms to send customised marketing emails within minutes and the product is proving to be very popular with clients.

DotDigital has grown its revenues from £9m in FY2011 to £26.9m in FY2016 and shareholders have been well rewarded over the last five years with the share price jumping from around 8p in 2011 to over 50p today. However in my opinion, the company is still very much under the radar and I believe there’s more growth to come.

The group released another impressive set of results this week, with turnover and earnings per share increasing 26% and 12% respectively for the year ended 30 June 2016. Recurring revenues were lifted from 76% to 78%, and the company’s cash position was boosted to £17.3m at year-end, up from £11.9m last year. To top it off, dotDigital increased its final dividend from 0.36p to 0.43p and announced a special dividend of 0.41p, taking the total payout to 0.84p, a yield of around 1.6%.

The market was underwhelmed by the results, with the share price dipping a few percent on Tuesday, however that’s a pattern I’ve noticed before with dotDigital. The share price will fall on respectable results, but then move higher in the coming weeks and months.

I believe it’s an exciting time for dotDigital with the company looking to grow throughout the EMEA, North America and Asia Pacific regions. It currently trades on a P/E ratio of 24 times next year’s estimated earnings, which I don’t think is unreasonable for a company that’s growing quickly and consistently.

Redcentric

Another small-cap that looks to be flying under the radar is IT services provider Redcentric(LSE: RCN).

Redcentric offers its clients a range of IT services such as infrastructure, network, cyber security and cloud services and has built its business model around generating long-term recurring revenues from its clients. It’s a business model that appears to be working well, with revenue jumping from £58m two years ago to £110m for FY2016. Analysts predict revenues to continue climbing with growth of 9% and 8% forecast for the next two years.

The company announced in late September that with the help of recent acquisitions it was seeing low-double-digit headline recurring revenue growth for the first half of FY2017, and that the board remained confident in the outlook for the business.

After a 20% fall in the share price since May, Redcentric is now trading on an appealing P/E ratio of around 14 times next year’s estimated earnings, which looks to be good value to me.

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.

Edward Sheldon owns shares in Dotdigital Group. 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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