This small-cap has already turned £1,000 into £10,460. Should you keep buying?

Roland Head takes a look at a 10-bagger with exciting prospects as a potential FTSE 100 stock.

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Sometimes the most profitable companies to invest in are those which have already proved themselves to be winners.

Today, I’m looking at two stocks which have delivered healthy gains for investors over the last five years. The first is small-cap giftware and stationery manufacturer IG Design Group (LSE: IGR).

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I’ve long been a fan of this £330m AIM-listed company, which sells products such as wrapping paper and party decorations. IG Design’s share price has risen by almost 950% over the last five years, helped by a 350% increase in profit over the same period.

The company’s growth has been driven by a mix of organic expansion and acquisitions. Today, IG announced one of its largest acquisitions to date, a £56.5m deal to acquire Impact Innovations, a leading supplier of gift packaging and seasonal decorations in the USA.

To help fund this transaction, IG plans to raise up to £50m in a placing of new shares at 510p. Despite the new shares selling at a modest discount to today’s opening price of 534p, the share price was up by about 4% at the time of writing. This strong performance suggests to me that investors support this deal and are confident of further growth.

Is the stock a gift at this price?

Paul Fineman, Design Group’s chief executive, expects to achieve $5m in annual cost savings over the next three years. Fineman says that the acquisition of Impact Innovations should add to earnings per share in each of the next three years, and expand the group’s customer base of major US retailers.

Today’s gains leave IG Design shares looking fully priced, on 21.8 times forecast earnings for 2018/19. However, this firm’s track record of growth suggests to me that the business could grow into this valuation fairly quickly. For long-term investors, I’d continue to rate these shares as a buy.

A market-beating retailer

One place where you might find IG Design Group products for sale is your local branch of B&M European Value Retail (LSE: BME).

B&M’s blue and orange storefronts have become a regular site in town centres and retail parks, as this discount retailer has expanded rapidly across the UK. Shares in the firm — which sells popular ranges of groceries and household goods — have risen by 44% since its flotation in 2014.

Annual profit has risen from £38.6m to £185.6m over the same period. One reason for this is that the group enjoys an operating margin of about 8% — more than double any of the listed supermarket chains.

There could be more to come

B&M plans to open another 50 stores in the UK this year, taking its total to around 600. Like-for-like sales rose by 4.7% last year, and the group’s pre-tax profit rose 25% to £229m.

This level of sales growth is well ahead of the big supermarkets. It suggests to me that the group’s value-focused business model fits well with modern shopping habits and could be taking market share from traditional retailers.

Trading on 19 times forecast earnings for the current year, this stock isn’t obviously cheap. But earnings per share are expected to rise by about 18% this year, and by a similar amount next year.

If this growth can be maintained, I think the current share price could still leave room for further gains. In my view, B&M could be a future FTSE 100 stock.

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Roland Head 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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