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

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

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »