2 cheap small-cap growth stars I’d buy before it’s too late

Royston Wild discusses two small-caps with dynamite earnings potential.

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Travel operator On The Beach (LSE: OTB) has seen its share price ascent take in fresh record peaks just shy of 390p per share following the exceptional financials released this month.

And with the online travel agent steadily grabbing share from its traditional rivals, thanks in no small part to the appeal of its bespoke packages, I reckon the stage is set for the sun-and-sand specialist to keep on rising.

On The Beach saw total revenues leap 7.3% to £38.1m in the six months to March, a result that propelled pre-tax profit 33.8% higher, to £9.9m. And promisingly, chief executive Simon Cooper announced that the strengthening of bookings witnessed towards the end of the period had continued into the second fiscal half.

The business is successfully riding the e-commerce phenomenon with holidaymakers increasingly buying their packages online instead of popping into a high street travel agent.

And the acquisition of fellow internet-only operator Sunshine.co.uk earlier this month for £12m significantly bolsters On The Beach’s revenues opportunities. The newly-acquired unit will add 200,000 customers to the 1.2m sun worshippers currently travelling with the company.

Lie back and relax

City brokers are in agreement that On The Beach is set to put recent earnings weakness firmly behind it, and current forecasts suggest a 31% earnings bump in the year to September 2017 is on the cards. But the good news does not end here as an additional 25% rise is forecast for next year.

And these projections make On The Beach knockout value for money too. Sure, a forward P/E ratio of 22.6 times may ride above the broadly-considered value yardstick of 15 times. But a PEG reading of 0.7 (well underneath the bargain benchmark of one) suggests the travel titan is actually attractively valued relative to its earnings potential.

In the fast lane

Carclo (LSE: CAR) is another hot growth star trading far too cheaply, in my opinion.

The engineering play has a long track record of generating formidable, double-digit earnings expansion. And the number crunchers see no reason for this rich record to end any time soon — rises of 13% and 21% are pencilled-in for the years to March 2018 and 2019 respectively, following on from a predicted 14% surge for last year.

These predictions leave Carclo dealing on a forward P/E multiple of 11.2 times, as well as a PEG ratio of 0.9 times, figures which fail to truly value the progress the plastics manufacturer is making just in the automotive sector.

The LED division’s Wipac arm — which builds lighting systems for the prestige car market — has “continued to win new lighting programmes,” Carclo announced earlier this month.

And most promisingly, the West Yorkshire business announced it had won a second mid-volume project on a vehicle for the hybrid market, a huge step in its progression into the mid-volume area.

I reckon Carclo could prove a spectacular growth pick in the coming years, particularly as global vehicle build rates continue to soar.

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 considered so you should consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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