These small-cap growth stocks still feel like the market’s best kept secrets. But for how long?

Paul Summers takes a look at two minnows that still appear under-appreciated by the market.

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Pawnbroker, jeweller and foreign exchange specialist Ramsdens Holdings (LSE: RFX) was my top pick for 2018. Based on today’s full-year results and the market’s reaction to them, this looks to have been one of my better calls.

Reporting “continued growth across all business segments” this morning, group revenue at the small-cap rose 16% to just under £40m over the 12 months to the end of March.   

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The diversified firm’s Foreign Currency Exchange and Retail divisions were the standout performers, with revenue growing 26% (to £11.3m) and 35% (to £8m), respectively. That said, the pawnbroking arm continues to tick along nicely with revenue here rising 14% to £7m. Precious metals revenue rose by a single percentage point to just under £11m.

The most interesting number to catch my eye, however, was the 242% increase in online jewellery sales over the reporting period. This, combined with the 117% rise in its Click & Collect currency exchange service, is further evidence that Ramsden’s focus on building its IT infrastructure and digital presence is really starting to reap benefits.

Speaking of which, underlying pre-tax profit soared by 60% to £6.5m, compared to the £4m achieved in the previous financial year.

Based on the 16.3p earnings per share achieved in 2017/18, Ramsdens is currently trading on a trailing price-to-earnings (P/E) ratio of just under 12. That still looks very reasonable considering the company also had a net cash position of £12.7m at the end of March, compared to £9.5m in the previous year. Aside from the value on offer, income hunters should also be encouraged by the 400%+ rise in the (easily covered) dividend from 1.3p to 6.6p.

Ramsdens might not shoot the lights out in terms of share price performance but, as a gentle grower in a market where many companies continue to over-promise and under-deliver, I believe it remains an excellent candidate for small-cap-focused portfolios.

Gathering speed

Of course, Ramsdens isn’t the only small business that could be a great buy at the current time. For those willing to take on a little more risk, eye-tracking technology specialist Seeing Machines (LSE: SEE) might fit the bill.

While there’s been lots of progress since I last covered the company back in 2016, things have really kicked into gear over the last few weeks, for two reasons.

First, there was news that the EU is to mandate Driver Monitoring Systems (DMS) — technology designed to monitor attentiveness/distraction — by 2020. Given its industry-leading status, this is clearly an excellent development for the Canberra-based business.

More recently, the £230m-cap announced a programme design win with a “global US-headquartered automotive OEM” (Original Equipment Manufacturer) to employ its FOVIO chip “into multiple vehicle platforms for mass production from 2020“. Although the name of the latter hasn’t been revealed, there are strong indications that it’s none other than Ford.

With other OEMs likely to begin/continue knocking on its door and confirmation that Euro NCAP — the vehicle safety advisory body — will favour camera-based systems as the preferred DMS option looking likely, it feels like Seeing Machines has hit something of a purple patch. 

Having climbed well over 100% in value since the beginning of May, a degree of profit-taking in the near future wouldn’t surprise. For those (like me) willing to continue holding, however, I think the biggest gains — and possibly a takeover bid, or two — are still to come.

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Paul Summers owns shares in Ramsdens Holdings and Seeing Machines. 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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