Two monster stocks in the making

Bilaal Mohamed reckons these two small-cap weaklings could be the stock market giants of tomorrow.

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Sports nutrition company Science in Sport (LSE: SIS) announced its half-year results this morning, reporting an impressive 28% rise in revenues thanks mainly to international expansion and investment in its e-commerce business.

Overseas markets

The AIM-listed business revealed that total revenues grew from £6.48m to £8.27m during the six months to 30 June, with a particularly strong performance from its e-commerce business. This delivered 87% growth across all markets, and now accounts for 51% of total revenues. International sales growth was also impressive at 55%, with 27% of total revenues coming from overseas markets, compared to 22% for the same period in 2016.

Science in Sport (SiS) develops, manufactures and markets sports nutrition products for professional athletes and sports enthusiasts. SiS products are sold in a range of retail channels, including specialist sport retailers, major grocers, high street retailers and e-commerce websites.

A monster in the making?

The business has been investing heavily in international markets, with major emphasis on building brand awareness and implementing its online customer acquisition and conversion model. The brand is particularly strong in the elite athlete community, with no less than 34 medal-winning athletes or teams using the company’s products at the 2016 Rio Olympics.

Focusing on international expansion and investing in the e-commerce business seems to me the right way to go, and I reckon these key areas of growth might one day transform this small-cap weakling into a fully-fledged FTSE monster.

Health and fitness

No-one can deny that health and fitness is big business these days, and one of the most noticeable trends of modern times has been the increase in gym membership in the UK. Here, low-cost operator The Gym Group (LSE: GYM) is making great inroads into what is undoubtedly a growing market. The group’s disruptive business model allows its members 24/7 access to almost all its sites on a pay-as-you-go basis. That’s right, there’s no contract to sign and membership can just stop and start as required.

Founded just 10 years ago, the Guildford-based group pioneered the low-cost operating model that now boasts 98 gyms in major towns and cities nationwide, and whose membership has swelled to over half a million. The business continues to expand rapidly, and only last week announced its latest acquisition, Lifestyle Fitness, for £20.5m.

Expanding bottom (line)

The group will acquire Lifestyle’s 18 gyms, located mainly in the Midlands and North of England, 10 of which will immediately be converted to The Gym brand, with the remaining eight sites continuing to operate under the Lifestyle Fitness brand, to be converted in due course.

The move is part of the group’s previously stated strategy to identify bolt-on acquisitions as a way of accelerating its rollout, and analysts are expecting the rapidly-expanding estate to boost earnings by almost 30% by the end of next year.

The shares may look expensive at 28 times forecast earnings, but this falls to 24 next year, not too expensive given the rapidly expanding bottom line. Slim waists and fat wallets – now there’s a winning combination!

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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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