2 small-cap growth stocks I’m watching closely

Paul Summers explains why he’s added these market minnows to his watchlist.

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The lure of small-cap stocks isn’t hard to comprehend. Thanks to their ability to grow revenue and profits at a quicker pace, they have the potential to make investors seriously wealthy significantly faster than companies listed on the main market, albeit with greater share price volatility.

With this in mind, here are two market minnows I’ve recently added to my own watchlist.

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Strong sales growth

Holders of personal care and beauty products supplier Swallowfield (LSE: SWL) endured a roller coaster 2017 as the company’s shares bounced up and down within the 300p to 400p range — a decent illustration of just how volatile market minnows can be over a short period of time. Nevertheless, I think the company could prove to be a great medium-to-long term pick if today’s interim results are anything to go by.

In the 28 weeks to 6 January, underlying operating profit rose 11% to £3.4m. Revenue came in at £40m with “strong sales growth momentum” seen in the company’s portfolio of owned brands (which now contribute 31% of total sales). It was supported by decent trading over Christmas, “further retail distribution gains” in the UK and Europe and new product launches. While starting from a low base, online sales also grew “significantly“, according to the company.

Even though an 18% rise in the interim dividend and confirmation that PZ Cussons Brand Director Tim Perman will take over CEO duties in July are encouraging developments, it’s Swallowfield’s growth potential that most attracts me to the stock. No slouch when it comes to acquisitions, the company backed up today’s numbers with the announcement that it had purchased the men’s grooming brand Fish for a total of £3m. With net sales of £1.7m and EBITDA to the tune of £400,000 last year, this seems like a good deal.

Priced at 13 times forward earnings, shares in Swallowfield aren’t particularly dear for what appears to be a well-run business. A forecast PEG ratio of just under 1 also suggests that investors should expect positive share price momentum going forward.

Record revenue

Another small-cap that’s caught my attention recently is Filta Group (LSE: FLTA).

The company specialises in cleaning fryers used in kitchens in a huge number of locations (including hospitals, restaurants and schools) and recycling the oil it collects. While not the most exciting line of work, the £49m cap is clearly doing something right based on this month’s trading update for the previous financial year (ending 31 December).

Revenue rose “over 30%” in 2017 to stand in excess of £13.25m — a record for the company. Strong organic growth in the UK was attributed to excellent trading at the firm’s FiltaSeal business, which installs refrigeration seals on site. Similar performance across the pond was explained by the increase in the number of franchises and Mobile Filtration Units in operation in the market.

Like Swallowfield, Filta seems set for a period of sustained growth. Indeed, having acquired Grease Management Ltd in August last year, CEO Jason Sayers has stated that Filta is committed to expanding “through both acquisitive and organic means over the short, medium and long-term“.

On a forecast price-to-earnings (P/E) ratio of 25 for 2018, there’s already a lot of positive news priced-in. That said, with the company now gearing up to grow its fryer management franchise business throughout Europe, I think the stock could still prove rewarding for new investors.

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Paul Summers 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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