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One small-cap growth stock I’d consider ahead of Fevertree Drinks plc

The performance of Fevertree (LSE: FEVR) in 2017 has been superb. The drinks company has delivered a rise in its share price of 71%, with investor sentiment improving as a result of upgrades to its guidance for the full year. The company is now forecast to record a rise in its bottom line of 60% in the current year, which suggests the business is performing well.

However, after such a large share price rise, the stock appears to be somewhat overvalued. Therefore, this smaller company could be worth a closer look for the long run.

Improving performance

The company in question is building services group T Clarke (LSE: CTO). It released a generally positive trading update on Friday, with its performance in the period since 1 July being upbeat. It is expecting to deliver results which are in line with guidance for the full year, with pre-tax profit due to be £6.5m and revenue expected to be higher than £300m.

The company’s forward order book now stands at £380m versus £320m at the same time last year. The integration of recently acquired ETON Associates seems to be progressing as planned. Alongside investment in its new off-site prefabrication manufacturing facility at Stansted, it could provide a catalyst for future growth. With continued demand for its specialist services and the company winning a number of contracts recently, its operational and financial performance could improve in future.

Valuation

Looking ahead, T Clarke is forecast to post a rise in its bottom line of 5% in the current year, followed by further growth of 8% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.7, which suggests that it may offer a wide margin of safety. Since the company has a price-to-earnings (P/E) ratio of around 6, it offers a dividend yield of 4.6% from a shareholder payout that is covered 3.5 times by profit. This indicates that there could be dividend growth ahead.

In contrast, Fevertree seems to have a relatively high valuation. The company’s P/E ratio of 60 may be easy to justify in the current year when earnings are due to rise by 60%. However, the financial performance is set to be less impressive next year. Its bottom line is expected to grow by just 4%, which puts it on a PEG ratio of around 13. This indicates that there may be a lack of upside potential on offer after an extremely profitable 2017 for investors.

In addition, Fevertree yields just 0.5% from a dividend which is covered 3.9 times by profit. While dividend growth may be high, its income return lags inflation.

Takeaway

While Fevertree Drinks has experienced a stunning 2017, next year may not be so prosperous for its investors. A high valuation and lack of strong earnings growth could make other companies such as T Clarke worth a closer look at the present time. Certainly, small-caps can be relatively risky, but the potential rewards may also be high.

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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.