Two hot small-cap stocks I’d buy today

These two shares could offer index-beating potential.

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While outperforming the wider index is never easy, it is possible for investors to generate higher returns than the FTSE 100. Clearly, it can take time for outperformance to become evident. However, there are a number of shares which could do so in the long run. Here are two smaller companies which may be relatively risky. But their potential returns could make them attractive at their current share price levels.

Impressive performance

Reporting on Thursday was IT services and solutions company Microgen (LSE: MCGN). The company’s share price gained over 15% due to the strong progress made in the first half of the year. Its financial performance is ahead of the Board’s original expectations for the period, while margins have been maintained in line with those from the prior year.

The company’s two business lines are executing on their strategies, with Aptitude Software delivering organic growth and Microgen Financial Services continuing its transition towards being focused on the Trust & Fund Administration market.

Looking ahead, the company is confident that the strong performance from the first half of the year will continue throughout the remainder of the year. Therefore, it has raised guidance for the current year. It is expected to report a rise in earnings of 13% in the next financial year, which puts it on a price-to-earnings growth (PEG) ratio of just 1.6. This suggests that further share price growth could be ahead even after today’s sharp rise.

Beyond next year, the potential for high demand for the company’s Aptitude Software division’s products and services could lead to a purple patch for the business. Therefore, while still a relatively small entity with above-average risks, now could be the right time to buy it for the long term.

Improving outlook

Also offering upside potential in the long run is spend control and e-procurement solution provider, Proactis (LSE: PHD). The company has delivered double-digit earnings growth in each of the last four years. This shows that it has a sound strategy which has ultimately proven to be highly successful.

Its outlook is also positive, with the company forecast to post a rise in its bottom line of 13% in the current year. It is expected to follow this with growth of 23% next year, which suggests that investor sentiment could improve over the medium term. Despite its positive outlook, Proactis trades on a PEG ratio of just 0.7 at the present time. This indicates that it has a wide margin of safety and could therefore deliver a rising share price even if its outlook is downgraded to some degree.

While the stock only yields 0.8% right now, dividend growth of 10% is forecast for next year. This shows that the company’s management team is upbeat about its future performance, and this could be reflected in improving financial performance as well as more positive investor sentiment.

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.

Peter Stephens 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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