Why I’d buy this hidden growth stock and this FTSE 100 growth star

Rupert Hargreaves looks over one small-cap he believes could be heading for the FTSE 100 (INDEXFTSE: UKX).

| 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.

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.

When looking for stocks to buy, most investors start their hunt with the UK’s leading index, the FTSE 100 because this is where the biggest and best companies can be found.

However, it’s in the small-cap arena where the market’s best growth stocks usually reside. But due to the risks of investing in small-caps, investors often overlook this part of the market.

Nevertheless, there’s one small-cap I’ve recently stumbled across, which looks to be a hidden growth champion.

Hidden growth stock

Since its IPO in March 2016, Harwood Wealth Management (LSE: HW) has wasted no time making an impact on the market. The UK-based financial planning and discretionary wealth management business has a market capitalisation of only £106m, but it already administers £4.3bn of assets, up by around a third since the end of April last year.

Asset growth is going straight to the bottom line. The wealth management business has high operational gearing, which means there are high fixed costs to begin with, but once profitability reaches a certain level, and costs are covered, margins on every additional £1 of revenue are significant. For example, Harwood’s net profit margin was just 1% in 2016. Thanks to revenue growth and economies of scale, City analysts expect the group to report a net margin of 8.3% this year. 

To capitalise on its existing size and established business base, Harwood is growing through acquisition. For the six months to the end of April, the firm spent £10.9m buying nine other wealth management businesses. Not only have these deals boosted profitability, but they’ve also given it more financial firepower to chase even more acquisitions. 

Considering the group’s aggressive growth plans, it is no surprise City analysts expect it to report earnings per share growth of 463% for 2018 (giving a full-year P/E of 23.6) and 27% for 2019 (forward P/E of 18.5). In my opinion, this growth makes the stock highly attractive, and I see no reason why the business cannot continue to grow at a similar rate for many years to come. 

It is this growth potential, coupled with the stock’s modest valuation that leads me to conclude that Harwood could be one of the best growth stocks around. 

Bigger is better?

 If it continues on its current growth trajectory, it could one day end up on a par with FTSE 100-listed wealth management group St James’s Place (LSE: STJ)

St James’s is going from strength to strength. After a strong 2017, new clients continued to flock to the firm’s offering during the first quarter with net inflows jumping 31%, to £2.6bn. 

Not only does St James’s have a solid reputation for investing clients’ money successfully, but the group also looks after its shareholders. As net profit has steadily increased, St James’s dividend per share has risen at an average rate of 32% over the past five years. City analysts are expecting at least double-digit payout increases for the next two years as earnings per share continue to expand (EPS growth of 74% for 2018 and 18% for 2019). Current projections suggest yields of 4.3% and 5% are on offer for the next two years. 

A forward P/E ratio of 22 times may seem demanding, but I reckon this is about right considering the group’s potential and historical growth.

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.

Rupert Hargreaves owns no share 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.

More on Investing Articles

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

2 reasons why I’m loading up on FTSE 100 shares

This Fool thinks FTSE 100 shares look cheap. With that, he plans to continue snapping them up today. Here's one…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Why wait? I’d buy FTSE 100 shares now before the next stock market rally!

Our writer explains why he'd snap up what he sees as bargain FTSE 100 shares now rather than waiting in…

Read more »

Investing Articles

Is it time for me to change my tune about Rolls-Royce shares?

This Fool has steered clear of buying Rolls-Royce shares. But after its recent performance, he's reconsidering his stance. Here's why.

Read more »

Investing Articles

Aviva share price: 3 reasons to consider buying for 2024

The Aviva share price is still lower then when I bought some nearly a decade ago. Here's why I'm thinking…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

These 2 shares could bank me £328 a month in second income

Jon Smith runs through two FTSE stocks that have above-average dividend yields that could pay out a generous second income…

Read more »

Stack of one pound coins falling over
Investing Articles

This passive income plan is simple – but could earn me thousands!

Christopher Ruane explains how putting a fiver a day to work in the stock market might help him earn thousands…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Charticle

After record profits, are Lloyds shares a buy, sell, or hold?

As Lloyds pulls in pre-tax profits of £7.5bn, boosts its dividend, and continues to repurchase shares, are the company’s shares…

Read more »

Investing Articles

NatWest shares: is a once-in-a-lifetime opportunity on the way?

Should investors get ready for a unique opportunity as the UK government plans to sell off its NatWest shares later…

Read more »