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263 reasons why I’d buy shares in this small-cap growth stock

Business development to success and FTSE 100 250 350 growth concept.
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In June, I said Bloomsbury Publishing (LSE: BMY) still generates a lot of revenue from the Harry Potter series, but other business lines are expanding well.” And to me, today’s half-year results report bolsters the case for investing in the stock.

Impressive figures

Revenue for the six months to 31 August 2021 came in up 29% year-on-year. And diluted earnings per share shot up by 263% — that’s 263 reasons why I’d buy shares in this small-cap growth stock now!

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Those figures look impressive, but the comparison period last year occurred in the depths of the pandemic. Nevertheless, City analysts predict the business is on course to deliver a full-year uplift in earnings of almost 8%. And they expect an even better performance the following year to February 2023.

Part of Bloomsbury’s long-term growth strategy aims at “diversifying into digital channels.” And chief executive Nigel Newton said today’s results were driven by the approach of publishing for both the consumer and academic markets, and by “growth of digital revenues.”

I’m in no doubt the business is clinging to its growth mojo. And I see the stock as a promising potential addition to my diversified portfolio. So I’m keen to research the opportunity further with a view to holding some of the shares for the long term. It will be interesting to me to see how the growth story develops.

A growth valuation, but cash-flush

Meanwhile, with the share price near 356p, the forward-looking earnings multiple runs just below 18 for the trading year to February 2023. And the anticipated dividend yield is around 2.7%. Of course, that’s not a huge payout. And it suggests, along with the P/E rating, the valuation isn’t cheap. But the directors raised the interim dividend by 5%. And the compound annual growth rate of the shareholder payment is running at just over 7% for the past few years.

The valuation appears to price the company for growth. And that’s fine if growth continues. But I could end up with a losing investment if the business fails to make its estimates for growth in earnings. In a scenario like that, the stock market would likely modify the valuation lower, taking the share price down. And growth stocks going ex-growth can plunge a long way. So there are some clear risks with this one.

But the cash-flush balance sheet encourages me. If Bloomsbury can hang on to its £40m-odd in the bank, I can account for it in my valuation calculations. I reckon doing that shaves about 16% off.

At some point with stock investing, I must take some risks in order to be in line for potential (but not certain) gains. And I like the fact that Bloomsbury has a well-defined strategy for growth that appears to be succeeding. So for me, this one can keep its place near the top of my buy list.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Bloomsbury Publishing. 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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