The FTSE SmallCap index can be a happy hunting ground for ambitious investors. The companies in this index currently sport market capitalisations of between about £100m and £800m. At least some of them will increase in value by five-fold, 10-fold or even more in the coming years.
Today, I’m looking at two companies from the index that I believe have considerable potential to be big winners.
Arrow
Established in 2005 and listed on the stock market in 2013, Arrow Global (LSE: ARW) is valued at just over £700m at a current share price of 400p.
The core of Arrow’s business is acquiring portfolios of non-performing loans from financial institutions, such as banks and credit card companies, as well as from retail chains, student-loan firms, utilities and so on. It buys the loans at a discount to face value and establishes affordable repayment plans for the indebted individuals and businesses. It expects to get back twice its investment over any 10-year period.
Potential FTSE 100 firm
Arrow currently operates in the UK, the Netherlands, Belgium, Portugal, France and Italy. Its aim is to become Europe’s leading purchaser and manager of debt. This is ambitious but credible, in my view, and we could be looking at a future FTSE 100 firm.
Last year, earnings increased 29% and a similar increase is forecast for the current year, giving an undemanding price-to-earnings (P/E) ratio of 12 and a hugely appealing price-to-earnings growth (PEG) ratio of 0.4. There’s also a prospective dividend yield of 2.8%.
With management confident it can deliver a medium-term underlying return on equity percentage in the mid-20s, high-teens earnings growth and a progressive dividend, the current share price looks highly attractive to me and I rate the stock a ‘buy’.
On The Beach
On The Beach (LSE: OTB) was founded in 2004 and joined the stock market in 2015. At a current share price of 380p, its market cap is a bit under £500m.
The company’s disruptive online-only business model has enabled it to rapidly capture around 20% of the UK online short-haul beach holiday market, with its largest competitors being TUI and Thomas Cook. On The Beach is intent on increasing its market share and its recent (earnings-enhancing) acquisition of another established online brand, Sunshine.co.uk, further strengthens its position.
Expanding into Europe
In addition to its growth prospects in the UK, it has a vision to become Europe’s leading online retailer of beach holidays. Scandinavia is its first target and its Swedish business is already growing fast from a low base. Its Norwegian site has only recently launched.
Analysts are forecasting group earnings growth of over 30% for the company’s financial year ending 30 September, giving a P/E of 22 and a PEG of 0.7. There’s also a prospective dividend yield of 0.8%. These value credentials aren’t quite as strong as Arrow’s but are compelling enough in their own right for me to also rate this stock a ‘buy’.
