Two small-cap growth stocks I’d buy in September

Roland Head offers up two choices for small-cap investors hunting for a bargain.

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Stock markets have enjoyed a six-year bull run. But I believe there are still opportunities for stock-picking investors to find growth companies at reasonable valuations. Today I’m going to look at two stocks I’ve rated as potential buys following recent results.

Digital marketing and ad tech company Crossrider (LSE: CROS) has risen by 143% over the last year. The group’s share price hit a low of 25p in 2016 after investors appeared to lose faith in the firm’s growth plans. But Crossrider’s performance is improving. It is now developing a subscription-based business model, targeting high levels of recurring revenue.

Today’s results suggest the company is making progress. Revenue rose by 5% to $30.1m during the first half and the group’s operating loss fell slightly from $932k to $891k.

The group’s shares have risen by 5% today, which suggests to me that investors are encouraged by the progress made so far. However, I believe there’s also a second, potentially transformative, opportunity at Crossrider.

The group had net cash of $68.7m on its balance sheet at the end of June. That’s high compared to its market cap of £89m, (about $114m). Some of this cash will be used to fund growth and acquisitions. However, if the group breaks into profit this year, as expected, then I think this cash could acquire a new significance.

You see, analysts are forecasting adjusted earnings of 4.9 cents per share this year. These would put the stock on a forecast P/E of about 18. But if you adjust the group’s share price to ignore Crossrider’s net cash, then the effective forecast P/E is just 7.3.

That’s very cheap for a growth stock. So although I’d want to do some further research, investors who believe Crossrider’s management can deliver on its growth plans might want to consider snapping up a few of these shares.

A buy-and-forget stock

Crossrider’s growth may yet disappoint. But ceramics and giftware firm Portmeirion Group (LSE: PMP) — whose brands include Royal Worcester and Wax Lyrical — is a proven performer I’d be happy to buy for a long-term portfolio.

The shares are currently 10% below the 52-week high of 1,000p seen earlier this year, but in my view this sell-off could be a buying opportunity. This business is heavily seasonal, as a large proportion of sales take place at Christmas in the three main markets of the UK, North America and South Korea.

The next set of results will see the first full-year contribution from Wax Lyrical, which Portmeirion acquired last year.

Analysts covering the company expect to see revenue rise by around 9% to £83.3m this year, while earnings per share are expected to rise by about 10% to 66.3p per share. A 4% dividend hike has been pencilled in, giving a payout of 33.4p per share and a yield of 3.7%.

These figures are attractive enough, in my view, but they become more appealing when we consider the group has net debt of just £1.7m and consistently strong free cash flow.

I believe there’s also a possibility that Portmeirion could become a bid target at some point, due to its portfolio of valuable brands and strong cash generation. In my view, these shares offer a low-risk trade with the potential to deliver a healthy profit.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Portmeirion Group. 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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