Is it too late to buy these rocketing small-caps?

An 11% share price fall in one morning may not seem like the “rocketing” performance mentioned in the title of this article. But it’s worth remembering that even after today’s drop, specialist currency manager Record (LSE: REC) is still worth 50% more than it was six months ago.

Today’s fourth-quarter update showed that the firm’s assets under management equivalent (AUME) rose by 2.8% to $58.2m during the three months to 31 March. I suspect today’s sharp fall was triggered by news that the firm’s client count fell from 64 to 59 during the quarter.

Although Record had warned of this in its previous update, today’s statement also revealed that a much larger client, representing $1.2bn of AUME, has given notice to leave during the current quarter.

A troubled business?

Record’s business is extremely profitable. Net cash of £36.2m was reported at the end of September and the company’s commentary suggested that Record might pay a special dividend in addition to the forecast yield of 1.6p per share. For income investors, Record ought to be attractive.

The company’s weakness appears to be delivering consistent growth. Customers who sign up for the group’s currency hedging and investment bring with them a lot of cash. The average AUME per client is $986m, according to today’s figures.

However, Record’s clients don’t seem as loyal as you might expect for a specialist business. Gains from new clients often seem to be cancelled out by losses from departing ones.

I’m not entirely sure why they don’t stick around. I’d want to do further research into the nature of the firm’s clients before deciding to invest. But with the stock trading on a forecast P/E of 15.5 and offering a prospective yield of 3.8%, I don’t think the valuation is excessive. I’d rate Record as a hold.

A true growth stock

IT services and software provider Microgen (LSE: MCGN) is more of a traditional growth stock than Record. Revenue rose by 35% to £43m last year, while the group’s operating profit rose by 55% to £8.2m. The firm’s share price has risen by 57% so far in 2017.

Its business has two main divisions. Aptitude Software provides financial control and reporting software that’s apparently used by many large companies in the telecoms and financial sectors. Aptitude is now targeting a move into the US healthcare sector, which I’d imagine could be a lucrative market. Its revenue rose by 58% to £26.4m last year, which suggests the business still has plenty of room to grow.

Microgen’s other division focuses on financial software for wealth management and payment firms. Revenue from this business rose by a more modest 9.2% to £16.6m last year. However, 80% of this revenue is recurring, so it should provide reliable cash generation to support growth elsewhere.

Microgen stock doesn’t look cheap. The shares trade on a 2017 forecast P/E of 23, falling to a P/E of 20 for 2018. But broker forecasts for the group have risen substantially following the firm’s last two sets of results. The group’s cash-backed dividend — which yields 1.7% — is also a welcome sign of financial discipline.

If Microgen’s profits continue to beat expectations, then the stock could look cheap at current levels in a couple of years’ time.

Our top small-cap buy

I believe Microgen and Record both deserve a closer look. But here at the Motley Fool, our analysts have identified another small-cap stock which they think is seriously undervalued.

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Roland Head has no position in any 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.