£1,000 to invest? Here are two small-cap growth stocks to consider

Are the smallest companies the best growth prospects? Here are two you might think of putting a cool grand on, but be aware of the risks as well as rewards.

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I’ve kept an eye on Watchstone Group (LSE: WTG) ever since its troubled days as Quindell, when a forced restatement of its accounts and the opening of an investigation by the Serious Fraud Office caused panic.

On Thursday, Watchstone released its first-half results, and it’s no surprise that the losses are continuing. Revenues dipped to £19.7m from £22.9m, resulting in a bigger EBITDA loss of £2.1m (from £1.7m), and a jump in the pre-tax loss to £3.5m from just £0.01m a year previously.

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The firm’s healthcare business was said to be growing, with revenues up by a modest 2.6%, though foreign exchange translated that into a 1.3% sterling fall. The other part of the business, Ingenie, “continues to face very difficult market conditions,” with revenue dropping to £4.8m from £7.7m.

Loads of money

What I find most interesting about Watchstone is its cash position. The firm had cash and term deposits of £58.4m at 30 June, plus an additional £50.2m in escrow pending the outcome of legal action by Slater & Gordon related to the sale of the old Quindell’s Professional Services Division.

That total, of £108.6m, dwarfs the company’s current market capitalisation of £46m, which makes for a very unusual company valuation — one which certainly makes it more than a bit tricky to value the underlying businesses.

Are investors holding the shares in the hope of owning around £2.40 in cash for every £1 invested, in the event that the legal action by Slater & Gordon fails? Given that the action alleges “breach of warranty and/or fraudulent misrepresentation for a total amount of up to £637m plus interest in damages” (which Watchstone “denies … in the strongest terms“), that’s perhaps a risky strategy.

Continuing growth

A first-half trading update from Harvey Nash Group (LSE: HVN) gave its shares a modest morning boost, on top of a doubling over the past two years. 

The technology recruitment and outsourcing specialist has been growing its earnings steadily, and last year’s EPS rise of 29% helped support a progressive dividend policy too. The January 2018 yield came in at 4.9%, and while the subsequent share price gains have dropped the forecast 2019 yield to 3.4%, that would be thrice covered and looks very solid to me.

The first half of the year brought in £527m in revenue, up from £422m, “largely due to increases in contract recruitment, managed services and IT outsourcing as a result of both organic growth and acquisitions” with permanent recruitment essentially flat.

In line

That translated to a rise in gross profit from £46.5m to £51.7m, with the company telling us that “trading remains in line with the Board’s expectations for the full year.” But what does this all mean?

For me it means a good long-term income and growth prospect, with the shares on an attractive valuation. In addition to that tasty and growing dividend, we’re looking at forward P/E multiples of only around 9.5. 

I imagine some investors are wary about the lack of sparkle in permanent recruitment, and the currently sluggish economy will surely weigh heavily on that — especially with the possible Brexit effect still pretty much an unknown. But I’m seeing an attractive prospect here. 

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Alan Oscroft 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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