2 high-growth small-caps I’d buy today

Bilaal Mohamed discovers two hidden gems that could deliver significant long-term gains.

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Promotional direct marketing group 4Imprint (LSE: FOUR) this morning announced a very encouraging set of interim results as organic revenue growth continued to outpace the rest of the industry.

Highly developed business model

The small-cap media group is now the leading direct marketer of promotional products in the US, Canada, the UK, and Ireland, with a highly developed business model which provides millions of potential customers with access to tens of thousands of customised products. Organic growth is delivered using a wide range of data-driven, offline and online direct marketing techniques to capture market share in the large and fragmented promotional products markets that it serves.

For the six months to 1 July, total revenues came in at $298.91m, 11% higher than the same period in 2016, with pre-tax profits up by a staggering 41% on the previous year at $15.7m. At the demand level, a total of 587,000 individually customised orders were received, up 11% on the previous year, with 125,000 new customers acquired during the six-month period.

Significant capital growth

North America continues to be the most important market for the group, accounting for 97% of the total revenue generated during the first half of 2017. Here the company’s 11% growth rate compares very favourably with the latest estimates which suggest that the overall promotional products markets in the US and Canada are likely to be growing at a rate of around 3%. I see 4Imprint continuing to make further inroads into these very substantial markets.

The shares have pulled back considerably since hitting record highs at the start of the year, providing a great entry point for long-term growth-focused investors. A P/E rating of 19 may look expensive, but I believe the company will easily grow into the valuation and provide shareholders with significant capital growth over the longer term.

Strong momentum

Another small-cap firm that I believe looks set for further gains is Acal (LSE: ACL). The Guildford-based customised electronics supplier recently issued a very positive first quarter trading update, with a continuation of the strong momentum seen in the final quarter of 2016/17.

Revenues for the three months to the end of June came in 14% ahead of last year at constant exchange rates (9% ahead organically) with similar organic growth rates in both its Design & Manufacturing and Custom Distribution divisions. The order intake for the first quarter was also impressive, up 21% at constant exchange rates, lifting the forward order book to another record high and positioning the group well for further growth.

Acal’s management remains confident of delivering further progress through the rest of the year, and City boffins seem to agree, with consensus forecasts suggesting an 11% rise in earnings for the current financial year, and a further 8% improvement for FY2019. The shares have enjoyed a strong rally in recent months, gaining 50% since March, but I believe a forward P/E ratio of 15 is a price well worth paying given the continued strong momentum.

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.

Bilaal Mohamed 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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