2 secret growth stocks I think are worth adding to your watchlist

Paul Summers highlights two under-the-radar stocks he thinks warrant more attention from growth investors.

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Some of the most profitable investments are often those involving companies that, despite growing revenue and profit for many years, rarely make the headlines. This morning, I’m highlighting two such stocks from lower down the market spectrum.

Quality…at a price

I can’t pretend to understand the science behind what small-cap Bioventix (LSE: BVXP) does in much detail, apart from saying that it develops and supplies antibodies for use in the diagnosis of conditions such as heart disease, cancer and drug abuse. What I can tell you is that it’s a first-class business, generating absolutely huge operating margins and returns on capital employed — the latter being just the sort of thing one of the UK’s most successful fund managers looks for. Based on its half-year report issued at the end of March, I shouldn’t think there’ll be much to worry about when the Farnham-based firm reveals its latest full-year numbers on 21 October.

Back in March, the company revealed 24% rises in both revenue and pre-tax profit (to £4.4m and £3.2m respectively). Its balance sheet remained strong with a closing cash balance of £5.5m. While far from being an income play, an interim dividend of 30p per share was also declared — 20% higher than at this time last year; not bad for an organisation with just 15 employees.  

Pretty much the only issue with Bioventix at the current time is the price of its stock. At a little less than 33 times earnings, the market is already expecting a lot. Should markets head southwards over the next month or so as a result of Brexit jitters, I’ll be in the queue to pick up a slice of this quality small-cap. 

Buy the dip?

Another growth stock that’s likely to be flying well under the radars of most retail investors is audio-visual specialist Midwich (LSE: MIDW). Its services include providing huge LED screens for a variety of clients and events. 

Trading over the first half of 2019 was encouraging, with this month’s interim results revealing a 19.2% rise in revenue to £314.8m and a 6.2% rise in adjusted pre-tax profit to £13.7m. 

In addition to this, there was a 5.4% increase to the interim dividend and news that acquisitions in the previous financial year were bedding in nicely. Indeed, these purchases, combined with three others over the first half of 2019, have helped to increase gross margin and open new markets for the company. 

In terms of share price performance, however, Midwich hasn’t exactly set the market on fire. Indeed, it’s been rather volatile over 2019, rising as high as 633p back in April only to fall back to the 500p mark over the summer.

That said, this company’s value is still well over double what it was five years ago. What’s more, the recent dip in form leaves the shares looking reasonably valued at 16 times earnings, especially when it’s considered that Midwich achieves consistently great returns on capital and is expected to yield 3.1% in the current year (with the payout covered twice by profit). The fact that it has operations in Europe and Asia Pacific as well as across the UK and Ireland should give it some degree of protection from any Brexit fallout

Again, like Bioventix, I’ll be sorely tempted to open a position if Midwich drops a bit more over the next few weeks/months. It’s on the watchlist for now.

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.

Paul Summers 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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