5 small-cap stocks Fools think have explosive growth potential

As long-term investors, we’ve seen plenty of success stories where stocks have multibagged beyond belief — but which could still have that unrealised growth potential in them?

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We’re generalising, of course, but history has shown that it’s most often well-run businesses with a smaller market cap that turn out to have long runways of growth and eventually provide early adopters of the stock with incredible wealth creation. But which firms could be the next, say, Games Workshop?

Creo Medical Group

What it does: Creo Medical manufactures instruments used in minimally invasive endoscopic surgery.   

By Ben McPoland. I reckon Creo Medical (LSE: CREO) stock has the potential to rise much further. In 2023, the medical device company is expected to have grown its revenue 13% to around £31m.  

In 2024 though, its top line is forecast to accelerate to around £40.6m as more surgeons are trained to use its Speedboat product. This versatile electrosurgical device is saving certain NHS hospitals a fortune as part of their bowel cancer and endoscopy services.

According to the company, Speedboat technology has helped drive an 87% reduction in the average length of stay from 8.39 days to 1.07 days. Over a one‐year period, costs were reduced from £8,800 per patient to £3,600 (a 59% reduction). 

Now, one thing holding the stock back is a lack of profitability. Creo is still loss-making, which adds risk to the investment case here. However, it expects to reach cash flow break-even in 2025, with profits following after.

If it can achieve this while still growing revenue by double-digits, then I think the share price can explode higher from this point. That’s 34p, as I write. 

Ben McPoland owns shares of Creo Medical. 

Eagle Eye Solutions Group

What it does: This tech company specialises in personalised digital marketing, offering a third-party-integrated platform.

By Oliver Rodzianko. Eagle Eye Solutions Group (LSE:EYE) seems to be offering advanced and personalised marketing solutions at just the right time. With artificial intelligence (AI) now being adopted by the mainstream, the desire for unique promotions will become the new standard. Eagle Eye is one of the firms leading in providing this.

One element that stands out to me regarding its financials is that it holds no typical debt and has only a moderate amount of other liabilities like accounts it owes. That lays the foundation for a solid investment, in my opinion.

It’s worth bearing in mind that Eagle Eye faces competition from some leading companies like Salesforce Marketing Cloud, Adobe Experience Cloud, and Cheetah Digital. It’s going to have quite a challenge on its hands in remaining competitive in AI with the bigger players. Nonetheless, Eagle Eye has still bagged customers like Asda, Pret, and Halfords so far.

Oliver Rodzianko owns shares in Salesforce.

Hostelworld

What it does: Hostelworld is a booking platform that focuses on hostels, in a large variety of tourist destinations worldwide.

By Christopher Ruane. If you try and book a hostel in most of Europe for this Summer, you’ll notice a few things. Availability is often tight – and prices are typically much higher than they were a few years ago.

Travel demand remains high, which is good for accommodation booking platforms in general. But the comparatively low cost nature of many of the sleeping options listed by Hostelworld (LSE:HSW) could mean that bookings stay strong even if an economic downturn hurts the higher end of the industry.

Revenues are soaring: Last year they increased 33% and surpassed pre-pandemic levels.

The company is profitable again after a few years of heavy losses. Net debt fell sharply last year to €12.3m.

The business model is simple and the low marginal cost of expansion is attractive. The pandemic era showed that a sudden slump in demand can see revenues collapse. But Hostelworld has bounced back and I think looks set for ongoing growth.

Christopher Ruane does not own shares in Hostelworld.

Porvair

What it does: Porvair makes specialist filtration equipment for aerospace, life sciences, and metal melt applications.

By Stephen Wright. With a market cap of £282m, Porvair (LSE:PRV) is the smallest company I own in my portfolio. But I rate its growth prospects extremely highly.

The company has a couple of different sources of growth. The first involves making more money in its existing operations and the second is through acquisitions.

Porvair operates in industries where competition is limited – or sometimes non-existent. That gives the company an ability to raise prices incrementally. 

There are also opportunities for growth by acquiring other companies. This can be risky, but Porvair’s size means it should have plenty of opportunities.

The company’s end markets are also cyclical, which is another risk. Aerospace turned down during the pandemic and healthcare inventories have been at elevated levels since.

Despite this, I bought the stock recently because I think it’s well worth the 17 times earnings the stock trades at. And I plan to continue doing so in the future.

Stephen Wright owns shares in Porvair.

Renold 

What it does: Renold is an international supplier of industrial chains and related power transmission products.

By Edward Sheldon, CFA. Right now, there are lots of small-cap stocks with explosive growth potential. However, one I want to highlight is chain and gear manufacturer Renold (LSE: RNO).  

There are several reasons I’m bullish on this stock. One is that it looks very undervalued at present. Currently, Renold has a price-to-earnings (P/E) ratio of just six. Considering that the company has a near-record order book, and that profits for the year ended 31 March 2024 are expected to rise 27%, that valuation strikes me as way too low.

Another is that around 40% of the company’s revenues come from the US. Given that the construction industry in the US is booming right now due to infrastructure spending, I think there’s potential for future results to be better than expected. 

Now, it’s worth pointing out that Renold has some debt on its balance sheet. This is not ideal in a high-interest-rate environment. 

At the current share price and valuation, however, I think the risk/reward setup looks quite attractive. 

Edward Sheldon has no position in Renold 

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.

The Motley Fool UK has recommended Games Workshop Group Plc, Porvair Plc, and Salesforce. 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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