Two spectacular small-caps trading at bargain valuations

Edward Sheldon looks at two fast moving small-caps that could have further to climb.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Fast-growing small-cap stocks often trade at eye-wateringly high valuations. Having said that, it’s not impossible to find companies that offer impressive growth at attractive valuations. Here’s a look at two smaller growth stocks that appear to be trading at bargain valuations.

XLMedia

XLMedia (LSE: XLM) is an online performance marketing company that assists in boosting internet traffic for its customers. The company has specific expertise in the online gaming sector, where it partners with over 150 online gaming operators in more than 20 countries.

Online gaming is a huge growth area at present, worth around $32bn globally, and XLMedia is enjoying strong momentum as a result. Indeed, over the last two years revenue has more than doubled from $50.7m to $103.6m and earnings per share have grown from 6 cents to 12 cents per share.

The growth looks set to continue, with City analysts pencilling-in revenue and earnings of $135.4m and 13 cents for FY2017, growth of 31% and 8% respectively. The group has no debt and had cash of $35m in the bank at the end of 2016. Another key attraction of the firm is the generous dividend on offer. The company paid out dividends of 7.6 cents last year, equating to a yield of 4.7% at the current share price. The payout is covered 1.6 times by earnings.

However, despite these impressive numbers, it does not have the same kind of lofty valuation that many of its small-cap peers have. Trading on a forward looking P/E ratio of just 12.5 right now, the company appears to offer strong value, given recent growth. The stock has trended up strongly over the last 12 months, rising nearly 100%, however with the valuation still relatively low, I don’t see why the uptrend can’t continue from here.

Taptica International

Also trading at what appears to be excellent value is mobile advertising technology company Taptica International (LSE: TAP). Headquartered in Israel, it offers artificial intelligence-based solutions for mobile advertising and has an impressive list of clients including Amazon, Disney and Facebook. Mobile advertising is another prolific growth area right now, and profitability at Taptica is booming, with adjusted earnings per share jumping from 10.6 cents in FY2014 to 26.3 cents last year.

Recent full-year results were excellent, with revenue surging 66% and adjusted EBITDA climbing from $7.4m to $25.7m. Analysts forecast earnings of 35 cents for FY2017, meaning that, despite a spectacular rise in the share price from 80p to 300p over the last year, the stock trades on a forward looking P/E ratio of just 11.3.

So why the low valuation? Several explanations come to mind. First, it’s possible that investors have become weary of companies headquartered outside the UK. Foreign-based stocks such as Globo, InternetQ, Plus 500 and Telit Communications have all seen their share prices punished heavily in recent years for various reasons, and perhaps investors are approaching Taptica with caution as a result.

Second, it’s worth noting that Chairman Tim Weller was also Chairman of InternetQ in the past, a stock that saw it’s share price fall dramatically back in late 2015. Lastly, with a market cap of just £185m, perhaps Taptica is genuinely flying under the radar of many investors. Either way, in my opinion, the stock warrants a closer look. 

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 Telit Communications. 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.

More on Investing Articles

A pastel colored growing graph with rising rocket.
Investing Articles

How much passive income could I make for every £1,000 invested in Aviva shares?

Even a relatively small investment in Aviva shares could generate much greater passive income, particularly if the dividends are reinvested…

Read more »

Close-up of British bank notes
Investing Articles

I’m considering 100 shares in this FTSE 250 gem to aim for £300 a month in dividends

Mark Hartley outlines why a lesser-known banking stock from the FTSE 250's worth considering for an income portfolio in 2024.

Read more »

Investing Articles

History suggests these UK shares might soar if interest rates are cut in August

Some UK shares could rocket if interest rates fall from its 5.25% high next month. And there's one our writer…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

Here’s why H1 results could boost the AstraZeneca share price

The AstraZeneca share price has been a success story in the past five years. With H1 results due, can it…

Read more »

Investing Articles

£17,365 in savings? Here’s how I’d use it to target a £6,700-a-month passive income

Here's how a lump sum investment could pave the way for me to make a four-figure monthly passive income in…

Read more »

Investing Articles

Down more than 10% in 6 months, Fools are backing these 5 UK stocks to reverse that – and then some! – by 2025

Some of our UK free-site writers have put forward their candidates for turnaround stocks!

Read more »

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »