2 ‘secret’ growth stocks I’d buy in February

These small-cap growth stocks are trading far too cheaply, says G A Chester.

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Shares of Gem Diamonds (LSE: GEMD) opened little changed after a Q4 trading update today. Listed on London’s main market and a constituent of the FTSE SmallCap index, this diamond miner has a market capitalisation of £125m at a share price of 90p.

I believe the price represents excellent value for money. And there’s a similar-sized company in a different industry that’s also trading far too cheaply, in my view.

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World-class mine

Gem Diamonds owns 70% of the Letšeng mine in Lesotho, an enclaved country, completely surrounded by South Africa. The Lesotho government owns the other 30%. Letšeng produces large, top colour, exceptional white diamonds and is the highest dollar per carat kimberlite diamond mine in the world.

The company also owns 100% of a mine in Botswana. This mine, which produces commercial-quality diamonds of lower value and size, has been on care and maintenance for the past year, largely due to depressed prices in the market for diamonds of this class.

Sparkling growth prospects

Gem Diamonds reported a strong final quarter to 2017. It sold 31,476 carats during the period, up 21% from Q3, and achieved an average price 19% higher at $2,217 per carat. It ended the year with net cash of $1.4m compared with net debt of $11.8m at the end of Q3.

The momentum has continued into this year, with the company already having recovered five diamonds of greater than 100 carats, compared with eight in the whole of 2017. Chief executive Clifford Elphick said: “This is largely attributable to the ongoing technical improvements made at the Letšeng mine.”

Gem Diamonds is well run with a strong balance sheet and trades at less than 10 times forecast 2018 earnings of $0.14 a share (9.86p at current exchange rates). And with analysts having pencilled in growth of up to 50% for 2019, I rate the stock a ‘buy’.

Thriving business

Pawnbroking is one of the oldest businesses in the world. Its long history is testament to both its profitability and an enduring demand for its services. It’s the main business of H&T Group (LSE: HAT), which was founded in 1897 and floated on AIM in 2006. Now the UK’s leading pawnbroker, H&T has a market capitalisation of £131m at a share price of 350p.

This is another company that enjoyed a strong final quarter to 2017. So much so that chief executive John Nichols told us in an update last month: “We expect the full-year profit before tax to be above current market expectations.” The stock is trading at 12.3 times analysts’ upgraded earnings forecasts of 28.5p a share, while an expected dividend of 10.5p for the year gives a solid 3% yield.

H&T is thriving and with a retail operation and personal loans business growing alongside pawnbroking, the group is forecast to deliver annual double-digit earnings growth for the foreseeable future. My Foolish friend Roland Head bought the stock recently and it looks very buyable to my eye too.

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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.

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 considered, so you should consider taking independent financial advice.

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