Can you afford to ignore these two small-cap growth stocks?

Can these two growth stocks jump-start your portfolio?

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Picking the market’s best growth stocks isn’t a precise science. Even the professionals struggle to consistently pick companies that can continue to report steady growth year after year without suffering any major setbacks.

But that’s not to say there aren’t stocks out there that can accomplish this feat. There are plenty of companies that have racked up impressive growth rates year after year, and if a company has shown that it can meet lofty growth targets in the past, it’s more likely to repeat this performance in the future.

Two top picks 

Dotdigital (LSE: DOTD) and Cohort (LSE: CHRT) are two such companies. Both are small-caps, and both have chalked up highly impressive growth rates over the past five years.

City analysts expect Dotdigital’s growth streak to continue for the next few years. For the company’s financial year ending 30 June 2017, analysts have pencilled-in earnings per share of 2.3p and a pre-tax profit of £7.9m. For the year ending 30 June 2016, the company reported earnings per share of 1.8p. 

If the company hits City growth targets this year, earnings per share will be up 27% year-on-year. 

Dotdigial is no stranger to such explosive growth. Between 2012 and 2016 the company’s earnings per share doubled, with growth during this period averaging 20% per annum. If the firm meets expectations for this year, earnings per share will have grown 155% in six years while pre-tax profit will have grown 220% over the same period. 

Unfortunately, with such an impressive record of growth behind the company, shares in Dotdigital aren’t cheap. The shares currently trade at a forward P/E of 23.4 and support a dividend yield of 1%. Nonetheless, if the company continues to grow earnings per share at an average rate of 20% per annum, this high valuation is easily justifiable.

Future dividend champion?

Shares in Cohort trade at a forward P/E of 15.8, which looks cheap compared to Dotdigital’s high multiple. The shares are cheap for a reason as the City expects the company’s earnings per share to fall by 7% for the year ending 30 April 2017. However, earnings per share growth of 15% is expected for the year after, and if the company meets this target, Cohort will have grown earnings per share by 100% in seven years. Over the same period, pre-tax profit has more than doubled. 

Barring this year’s slip up, Cohort’s growth over the years has been nothing short of impressive and if past trends continue, there’s no reason why the firm’s earnings per share can’t double again in the next six years. If Cohort’s earnings per share do double again, and the shares continue to trade at 15.8 times forward earnings, the stock could hit 948p by 2022, 137% above current levels. 

If growth slows, management has plenty of room to turn the company into an income stock as the current dividend payout of 7p per share is currently covered three-and-a-half times by earnings per share. 

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Cohort. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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