Finding the best growth stocks ahead of the herd can lead to dramatic increases in your wealth. Here are just two low-profile companies that I think could go on to reward investors handsomely over the long term, despite their rather high valuations.
As a result of its focus on the US healthcare industry, £400m cap software provider Craneware (LSE: CRW) may not be a business on many UK investors’ radars (at least for now). Recognised as a leading provider of “revenue integrity solutions“, the company dedicates itself to improving the financial performance of the one in four hospitals it currently serves.
At the end of last month, it was announced that “a growing hospital operator” had both renewed and significantly expanded on its contract with Craneware. Worth $6m, the new agreement will involve implementing the company’s solutions in a number of new facilities recently acquired by the hospital network.
Today’s AGM statement built on this good news by reporting that the company had experienced a “positive start” to trading in the current financial year, no doubt helped by the favourable market reaction to June’s launch of Trisus Claims Informatics — the first product on the company’s cloud-based platform. The Edinburgh-based business also reported observing “very encouraging results” for early adopters of its cost analytics product that is currently under development.
Over the last two years, Craneware’s stock has doubled in price. As such, it won’t come as a surprise to learn that the company now commands a high valuation. But while a forward price-to-earnings (P/E) ratio of 37 implies that a lot of positive news already appears factored-in, I think the company’s track record of achieving consistently high operating margins and returns on the money it invests go some way to justifying this. Add a rock solid balance sheet and “high levels of revenue visibility” to the mix and I suspect Craneware could still generate a very decent return for new investors.
Another company whose star appears to be rising is digital performance marketing specialist XL Media (LSE: XLM). A quick scan of September’s interim results helps to explain why the Jersey-based company’s stock has already rocketed 73% in price over the last year.
In the six months to the end of June, the business achieved record revenues of just under $69m — a 33% jump on the same period in 2016 — driven mostly by excellent organic growth in its publishing division. Pre-tax profit rose 23% to $19.5m.
No stranger to acquisitions, XL purchased Canadian credit card comparison website Greedyrates and US financial services website Moneyunder30 over the reporting period. US cybersecurity comparison site Securethoughts was also acquired and, given the growth currently being experienced in this area, could become hugely valuable over time.
Like Craneware, XL Media possesses a suitably strong balance sheet ($43.1m cash) and generates excellent returns on sales and the capital it employs. As a bonus, the latter’s stock also comes with a really-rather-decent 3.6% yield — a rarity for a growth-focused company.
The only slight drawback I can see at the current time is XL’s current valuation. Given the importance of comparing like with like, the stock looks fairly expensive relative to industry peers at 16 times forecast earnings. As such, investors may wish to wait for a general market correction before adding the stock to their portfolios.
Another great opportunity
If you're looking to buy the best growth companies on the market, don't do anything until you've read a special report from the Fool's Head of UK Investing Mark Rogers. He's convinced this top British brand is poised for great things in the years ahead as a result of its plans to significantly grow its international footprint.
Click here for your copy of Mark's report. It's completely FREE to read and comes with no obligation.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware. 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.