The Motley Fool

2 under-the-radar small-cap growth stocks with exciting momentum

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Today I’m looking at two very different small-cap growth stocks, both of which I believe could outperform expectations.

Racing ahead?

The first of these companies is the former owner of The Football Pools, Sportech (LSE: SPO), which released half-year figures today.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Sportech is building a technology-focused sports betting business. This has two main parts. It operates sports betting venues in Asia, Europe and North America, and provides the world’s most widely-used tote-based betting software for horse racing bookmakers.

The company is also loaded with spare cash. As a result of a VAT refund and the recent sale of The Football Pools, it had net cash of £76.2m at the end of June, compared to a market cap of £179m. The company has already returned £21m to shareholders this year, and has plans to return more cash, up to a maximum of £55m.

This is appealing, but I believe investors need to look beyond the cash and focus on the group’s continuing business. Today’s half-year results show that revenue from continuing operations rose by 5% to £36.4m during the six months to 30 June.

The group’s earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 5% to £3.9m. Looking at the figures in more detail, a fall in software sales seems to have been offset by an increase in recurring service revenues.

Sportech shares have risen by 41% over the last year and the group is cashed-up to fund acquisitions and expansion. But my concern after reading today’s report is that there’s not much evidence of underlying growth. Does the share price reflect this?

Analysts are forecasting adjusted earnings of 3.2p per share for 2017. After stripping out the group’s net cash, this gives an effective P/E of 17. That actually seems fairly reasonable. If Sportech’s growth plans are successful, the shares could deliver decent gains. I’d hold after today’s news.

A wizard buy for smart investors?

A publisher of printed books isn’t an obvious choice for a growth stock, but I believe Bloomsbury Publishing (LSE: BMY) has appeal. Not only does this group have a fast-growing digital division, but it’s also the publisher of Harry Potter books. With two new books due this year, sales should be buoyant.

However, my attraction to Bloomsbury stock isn’t just based on the company’s most famous character. I believe this is a high-quality business that’s performed well over a number of years, and now looks quite affordable.

Starting with the basics, analysts expect earnings per share to rise by about 13% in 2017/18, and by a further 6% in 2018/19. This puts the group’s shares on a forecast P/E of 14.2, falling to a P/E of 13.3 in 2018/19.

Growing momentum

However, what’s interesting about this is that broker forecasts for the year ahead rose significantly after the firm’s last set of results were published, in May. The firm’s next set of figures are due in October. If the company continues to impress City analysts, earnings estimates could be upgraded again.

Supporting Bloomsbury’s growth potential is a solid balance sheet, with £15.5m of net cash and no debt. So I’ve no concerns there.

I suspect many investors are overlooking Bloomsbury in favour of more exciting businesses. But in my view, this could be a surprisingly successful small-cap buy.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Roland Head has no position in any of the 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

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.