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2 small-caps with stunning growth outlooks

Buying cheap stocks has become more challenging after a period of share price growth. The FTSE 100 has risen to new highs this year and the dominant mood among investors is one of optimism. Therefore, valuations are reflective of this viewpoint, with there being fewer bargain stocks around than there were a matter of months ago.

Despite this, there could still be a number of stocks with investment potential. Many shares have high growth rates which may not yet be fully reflected in their share prices. Here are two companies which could fall into that category.

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Strong results

Reporting on Thursday was competition specialist Best of the Best (LSE: BOTB). The company announced a rise in revenue of 7%, with profit before tax increasing by 42.7%. This was aided by the success of the company’s strategy, with its revenue continuing to shift towards online and away from physical sales. In fact, around 80% of sales are now generated online, which reduces the company’s risk profile since new sites are not necessarily required.

The company announced a special dividend of 6.5p per share, with a 1.4p ordinary dividend also set to be paid. This puts the company on a yield of 2%, with dividends being covered 1.7 times by profit. Therefore, there could be scope for further growth in shareholder payouts in the long run.

However, it is with regard to the company’s earnings growth potential where there may be even more appeal for investors. Best of the Best is making investments in its online marketing, while it is seeing margin growth because of improving scale and competition frequency. This is allowing it to negotiate better prices on cars purchased, which is a trend that could continue in future. Therefore, while a relatively small company which has a high risk profile, it could prove to be a sound buy.

Low valuation

Also offering strong growth potential is online bingo operator Jackpotjoy (LSE: JPJ). While its bottom line is forecast to fall by 7% this year, it is due to reverse this decline with growth of 11% next year. This has the potential to gradually improve investor sentiment in the stock as the company’s financial performance improves.

Since Jackpotjoy trades on a price-to-earnings (P/E) ratio of just 6.3, it seems to offer excellent value for money. In fact, when combined with its forecast growth rate, its rating translates into a price-to-earnings growth (PEG) ratio of only 0.6. This suggests that share price growth could lie ahead after its 6% gain of the last month.

Clearly, the online gaming sector is becoming more competitive, and sector consolidation may therefore become more likely as incumbents seek to reduce costs. Due to Jackpotjoy’s relatively low valuation and upbeat growth prospects, it could be a realistic bid target. However, even if an offer does not come to fruition, it could still prove to be a strong investment for the long term.

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Peter Stephens 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.