These small-cap growth stocks could still make you amazingly rich

G A Chester reveals two small-cap growth stocks trading at discount prices.

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McBride (LSE: MCB) is the leading European manufacturer of household and personal care products that retailers sell under their own labels. Following a boardroom shake-up in 2015, new management set a target of increasing the group’s operating profit margin to 7.5% and return on capital employed (ROCE) to more than 25%.

It’s been making excellent progress. Last month, in its annual results for the year ended 30 June, it reported a rise in operating margin to 5.6% from 4.8% the prior year and an increase in ROCE to 27.7% from 23.4%. Earnings per share (EPS) advanced 18%.

However, after releasing a trading update today ahead of its AGM, its shares are down 7% at 215p, as I’m writing, valuing this FTSE SmallCap firm at £392m. Has there been a fundamental change to McBride’s growth prospects or is the dip no more than ‘noise’ and a great opportunity to buy a slice of the business at a discount price?

On track to deliver

Ahead of today’s update, the City was forecasting 20% growth in EPS to 15.7p for the year to 30 June 2018. After the hefty fall in the shares, the forward price-to-earnings (P/E) ratio is an undemanding 13.7, while the price-to-earnings growth (PEG) ratio of 0.7, is nicely on the value side of the PEG fair-value marker of one.

McBride said today: “At this early stage of the year the Board is comfortable that the business remains on track to deliver its full-year expectations.” So why the fall in the shares?

The company indicated in last month’s results and reiterated today that it expects the current year’s financial performance to be weighted towards the second half of the year, as increases in revenues from its growth strategy begin to come through. Perhaps the market is concerned by the amount of ground the company has to make up after reporting Q1 revenue today 6.7% lower at constant currency than the prior year.

However, based on management’s excellent record to date, I’m happy to go along with its second-half-weighting projections. As such, I view today’s fall in the shares as a great opportunity to buy at a discount.

More than meeting targets

Arrow Global (LSE: ARW) is another FTSE SmallCap firm with eye-catching financial targets. In fact, it’s currently exceeding its key targets of high-teens EPS growth and mid-20s return on equity.

Arrow buys portfolios of non-performing loans from banks, retailers, utilities and so on at a discount to face value and sets up affordable repayment plans. It’s been growing its business at home and on the continent for over 20 years and has a credible ambition to become Europe’s leading purchaser and manager of debt.

At a current share price of 412p, the company is valued at £722m. City analysts are forecasting EPS growth of 26% to 32.85p for the current year, giving a P/E of 12.5 and a PEG of 0.5. The valuation becomes even more attractive when we look to 2018. EPS is forecast to increase a further 23% to 40.5p, bringing the P/E down to 10.2 and the PEG down to nearer 0.4. As such, Arrow’s shares look very buyable to me at current levels.

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.

G A Chester has no position in any of the 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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