Small-cap stocks are the best place to invest if you want to get rich. So today I’m looking at two such stocks which have tremendous growth potential that I’m considering adding to my portfolio.
IFG (LSE: IFP) is a financial services group based in Ireland. With a market capitalisation of around £150m, the company flies under the radar of most institutional investors, but I believe it could be a great addition to any portfolio.
Over the past five years, IFG’s results have been mixed. Revenue has hardly grown, and the business reported a net loss last year, down from a net profit of around £22m in 2012. These figures are disappointing, but they don’t display the whole picture. Excluding one-off items, normalised earnings per share (EPS) have increased by 150% since 2012.
City analysts are expecting this trend to continue. EPS growth of 37% is forecast for 2018 and 16% for 2019.
It looks as if the business is well on the way to meeting these figures.
IFG’s preliminary statement for the half year ended 30 June shows a 42% increase in adjusted EPS to 4.2p. For the period, revenue expanded 12% and adjusted operating profit grew 54% to £5.7m.
The company has been boosted by rising demand for self-invested personal pensions or SIPPS. For the six months to the end of June, 2,469 new SIPPs were opened with the group’s James Hay wealth management business, and a further 134 clients opened new SIPPs with its Saunderson House business. Overall assets under administration rose 8% to £31.bn.
Unfortunately, the firm is also dealing with the number of legacy issues that have “significant taxation and regulatory components.” Dealing with these problems consumed £3.2m of profit during the first six months of the year.
I reckon this dark cloud is to blame for IFG’s low valuation of just 13.2 times forward earnings. That said, I’m attracted to the company because once these legacy issues are complete, shares could re-rate substantially higher. There is also a 3.2% dividend yield on offer while you wait.
Return to stability
If IFG’s complex legacy issues have put you off, another small-cap growth stock I’m interested in is Volex (LSE: VLX).
After losing a significant contract in the first half of this decade, Volex has spent the last several years trying to rebuild its business. Fiscal 2018 was the first year in five that the group has reported a positive net profit.
However despite the progress, it looks to me as if the market isn’t ready to give the company the benefit of the doubt just yet. Based on the City’s number for fiscal 2019, the stock is trading at a forward P/E of only 9.7.
I believe this is an excellent opportunity for risk-tolerant investors to buy into the company before the rest of the market. I reckon buyers will return when management can prove it has stabilised the business, which will take several years. Analysts believe normalised earnings per share will grow by around 10% for the next two years. If the group can meet these figures, it should be proof enough that Volex has moved on from its previous troubles.
Adding to the investment case is $10m of net cash on the balance sheet, which only makes this a more attractive investment opportunity in my opinion.