Alert: this micro-cap stock has massive growth potential

Micro-cap stocks can deliver big gains over the long term. Here are two you should check out, according to Edward Sheldon.

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Today I’m profiling two tiny growth companies that are well under the radar of mainstream investors. But don’t be put off by their small market capitalisations. Companies of this size can reward investors with huge gains over the long term.

K3 Capital

K3 Capital (LSE: K3C) only floated in April last year. The £69m market cap company is a business sales and brokerage firm with operations throughout the UK. Through its three trading subsidiaries Knightsbridge, KBS Corporate and KBS Corporate Finance, it acts for vendors of businesses in the price range of £50,000 to £50m. The group has recently received a number of adviser awards, including first place in the 2017 Thomson Reuters Small-Cap Financial Advisory Review.

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Since listing on the stock exchange at a price of 95p last year, the shares have soared to 180p today. That’s not surprising when you consider the momentum K3 currently has. Last year revenue and profit before tax rose 26% and 18% respectively, and the dividend was hiked 250%.

Yet to my mind, there could be plenty more to come from this micro-cap star. Today’s half-year results look excellent. For the six months ended 30 November, revenue rose 34% on H1 last year and EBITDA climbed 28%. Earnings per share increased 32% and the interim dividend was lifted by 217%.

Chief Executive John Rigby was upbeat in his assessment of the future, stating: “The positive momentum in the business continues to gain pace and the improved performance across all KPIs, coupled with the robust deal pipelines that exist across all three trading brands, lead us to a confident outlook for both the full year FY2018 and beyond.”

The stock is up around 10% today, but I believe the valuation still looks appealing at present. With analysts forecasting earnings per share of 10p for FY2018, the forward-looking P/E of 18.5 seems justified. Furthermore, if analysts’ dividend estimates are on the money, there could be some huge cash payouts coming to investors. The latest FY2018 consensus dividend estimate is 8.2p per share, a yield of 4.4% at the current share price.

Of course, stocks of this size can be volatile. That means they are higher risk. Yet overall, the risk/reward profile here looks attractive, in my view.

AFH Financial

Another micro-cap financial services stock that looks to offer strong value right now is AFH Financial (LSE: AFHP). The £112m market cap company is an independent financial advisor and discretionary investment manager that is growing at an impressive speed.

Indeed, between 2014 and 2016, assisted by several key acquisitions, revenue increased 60%, while net profit surged 180%. For the year ended 31 October 2017 (full-year results will be released in two weeks), revenue and net profit are expected to rise a further 37% and 130% respectively. Yet it’s not just the acquisitions that are powering the company’s growth, as AFH revealed in a November trading update, like-for-like growth for the year was around 20%.

Over the last three years, AFH shares have risen almost 100%, yet at the current share price, I believe value is still on offer. With earnings per share of 22.6p expected this year, the forward-looking P/E ratio is just 13.1. That valuation looks very reasonable to me, given the company’s track record of strong growth.

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Edward Sheldon 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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