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Two high-growth small-caps I’d buy today

Advanced Medical Solutions (LSE: AMS) has proven itself to be one of the AIM’s top growth stocks over the past five years. 

Since 2012, the company’s revenue has grown from £52.6m to £82.6m and pre-tax profit has risen from £10.8m to £19.1m. Meanwhile, earnings per share have jumped from 5.4p to 7.8p. City analysts are expecting further growth in the years ahead. The company is projected to report revenue growth around 10% to £92.4m for 2017 and then further growth to £103m for 2018. A pre-tax profit of £25.5m is expected for 2018, up 150% from 2012’s figure of £10.8m. 

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In a trading update issued today, management confirmed the company is on track to hit these targets as Advanced Medical grows through both acquisitions and organically.

Worth paying the price? 

Unfortunately, thanks to the company’s defensive nature and impressive growth, its shares are quite expensive. 

Based on current city forecasts shares in the company trade at a forward P/E of 33.9 and earnings per share growth of only 10% does little to justify this lofty valuation. The dividend payout of 1p per share for a yield of 0.3% is hardly a reason to buy either. 

Still, the one redeeming feature is the company’s hefty cash balance. At the end of 2016, Advanced Medical reported a net cash balance of £51.1m, up 49% year-on-year and equal to just under 10% of the company’s current £600m market capitalisation. Over the past five years, shares in the company have returned 330% excluding dividends.

Overall, if you’re looking for a highly defensive growth stock with more cash than it knows what to do with, and a record of producing returns for shareholders, Advanced Medical seems to be a great investment. Even though the shares might seem expensive, as Warren Buffett once said, “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Explosive growth rate

Quartix Holdings (LSE: QTX) looks to be an early stage Advanced Medical. Over the past five years, the company’s revenue has started to pick up, rising from £15.3m to £23.3m for 2016. Pre-tax profit has increased by £1.5m to £6.5m and earnings per share have grown from 8.5p to 12.9p. Pre-tax profit is expected to hit £6.7m this year before rising to £7.7m for 2018, and earnings per share are projected to increase to 13.5p over the same period. 

According to a trading update issued by the company this week, management believes that Quartix is on track to hit City forecasts for growth this year with new installations of its vehicle tracking systems growing by 40% during the six months to 30 June. With over 14,300 vehicles already using the group’s tracking systems, there is clearly a huge market out there for the tech. 

As management continues to pursue growth opportunities, investors should reap the rewards from further growth. Shares in Quatrix currently trade at a forward P/E of 32.6.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Advanced Medical Solutions and Quartix. 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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