2 multi-bagging growth stocks I’d hold onto for 2018

Roland Head highlights two small-cap growth stocks that could reward patient investors.

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Today I’m looking at two stocks that have both risen by at least 260% over the last five years. Is there still more to come, or should investors consider taking profits?

A clean sheet

Workwear and textile rental group Johnson Service Group (LSE: JSG) provides clothing, bedding and table linen for a range of businesses. The group said today that after a strong second half last year, its 2017 results are expected to be “slightly ahead of management expectations”.

It also announced a small acquisition aimed at boosting its presence in the north west of England. Wrexham-based StarCounty is a specialist hotel and catering linen business for which it has paid £3.9m. No details of StarCounty’s sales or profits were provided, but JSG did note that this price tag includes a freehold site valued at £0.9m.

Buy, sell or hold?

Today’s news marks the second time in four months that management has upgraded profit guidance for the full year. There’s no doubt that this is a growing business.

However, I believe there are a couple of risks worth noting. The first is that Johnson is heavily exposed to the catering and hotel sectors. In the event of a recession, demand could fall sharply. This could leave the firm with surplus rental inventory that has very little cash value.

A second risk is that the group’s balance sheet isn’t very strong. Net debt at the end of June was £90m, representing around four times trailing net profit. That’s pretty much the upper limit of what I’d be comfortable with, especially as the group doesn’t have much asset backing.

The shares rose by 2% after today’s news and now trade on a forecast P/E of around 17. The 2% dividend stock is reasonable for a growth firm. I’d continue to hold these shares while market conditions remain favourable. But I’d sell quickly on any signs of a slowdown.

One stock I’m holding

AIM-listed tech stock Taptica International (LSE: TAP) won’t be everyone’s cup of tea. And I have to admit to some nerves myself when I added the shares to my portfolio last year.

One reason for this was that as a big data-powered mobile advertising company, it wasn’t easy for me to judge how sustainable Taptica’s growth will be. Sudden setbacks are not unknown in this sector.

On the other hand, the company’s strong cash generation, clean profits and high margins suggested to me that — at the right price — it could be too good to ignore.

So far, so good

It issued a statement on Thursday advising investors that full-year profits are likely to be ahead of previous expectations.

The main reason for this is last year’s $50m acquisition of video advertising firm Tremor Video, which has turned profitable sooner than expected.

A second piece of good news was that the group’s growing presence in the Asia-Pacific region generated a “significant contribution to revenues” last year.

Is the price still right?

Consensus forecasts suggest that Taptica’s earnings may have risen by 40% to 30.2p per share in 2017. That leaves the stock trading on a forecast P/E of 18.

The shares aren’t as cheap as they were, but with earnings expected to rise by another 23% in 2018, I plan to continue holding.

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.

Roland Head owns shares of Taptica International. 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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