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2 ‘hidden’ small-cap stocks that could make you stinking rich

All sorts of companies are using technology to inch into niches right across the financial services sector, and one I like the look of is FairFX Group (LSE: FFX)

The e-banking and international payments group handles multi-currency payments, and reckons that with its online-only peer-to-peer approach it can provide very competitive foreign exchange services — and Wednesday’s first-half results lend support to that.

Turnover rose 26% to £434m and revenue grew by 33% to £6.1m, with gross profit up 37% to £4.8m and the firm’s gross margin picking up to 1.12% of turnover from 1.03%.

The company revealed a maiden half-year pre-tax profit of a modest £150k, but that’s a turnaround from a loss of £888k the year before, and analysts are predicting positive earnings per share (EPS) for the full year of around 0.6p.

Pivot point

For a first year of profit, that’s hard to quantify meaningfully, but a massive rise in EPS to 4.4p forecast for 2018 would put FairFX’s 70p shares on a P/E of 16. I see that as modest for a company at such an early stage of profitability, with growth stocks frequently commanding high multiples in their first few years.

So far in the second half, we’ve seen a £26.2m fundraising to acquire Spectrum Financial Group, which should accelerate the company’s “stated strategy of disrupting the SME banking space.

Another 35,410 retail customers were added, taking the total up to 623,602, and corporate card turnover soared by 95% to £59m.

In much the same way as the challenger banks have a very large sector to grow into, I can see plenty of opportunity for FairFX to extend its foothold and there could be some serious growth ahead.

Blue, blue sky

Another I’m seriously intrigued by is Destiny Pharma (LSE: DEST), which also released first-half results Wednesday.

There’s very little by way of comparison, as the company only came to market with an AIM flotation on 4 September, but the “clinical stage biotechnology company focused on the development of novel anti-microbial drugs, which address the global problem of anti-microbial resistance” has launched itself into a field that could easily prove very lucrative.

We’re looking at no profits yet, but a £0.92m loss for the period, and the firm reported £0.87m in cash on the books at 30 June. But that’s of no real significance now, as Destiny has started the new public phase of its life based on a £15.3m fundraising which helped launch its IPO.

Chief executive Neil Clark said Destiny is “now a well-funded drug development company” and is “focused fully on delivering its Phase IIb clinical study with its lead asset, XF-73, and progressing its earlier pipeline over the next two years.

Tempting and risky

I’m happy with the firm’s liquidity for a few more years at least, and any investment decision is now dominated by the potential for the novel drugs that are under development. We don’t know how long it will be before we could be in a post-antibiotic world, but drug-resistant bugs are challenging our best treatments at an accelerating rate.

The big risk for companies like this is that their big hopes can come crashing down if later-stage clinical trials fail, and that’s certainly happened before. But the potential must be huge if things come good. 

Destiny Pharma is one I could risk a small amount of money on.

Snagging future cash

Investing in new companies like these two is risky, but it can be a great step on the road to financial security.

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Alan Oscroft 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.