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A small-cap growth stock that could beat the FTSE 100’s best in 2018

If you’re looking for a great growth candidate for 2018, I reckon 1pm (LSE: OPM) is worth a closer look. 

The company, which specialises in arranging and providing funding for small and medium-sized businesses, has been out of favour and its share price has dropped from 80p in June 2014 to 49p.

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Much of that will surely be due to Brexit fears, and the companies that 1pm works with are likely to be in for a few unpredictable years. But Tuesday’s first-half results make me think there’s too much pessimism in the share price.

A 74% rise in revenue to £13.9m helped boost profit before tax and exceptional items by 77% to £3.6m. That needs to be tempered by the amount of equity issued by the company during the year, but even after that, we saw a 4.9% rise in earnings per share.

Steady during tough times

Chairman John Newman emphasised the company’s “strategy of being a multi-product provider of finance to UK SMEs” and told us that first-half growth “has been achieved whilst holding our price, controlling credit and spreading risk.”

Bad debt provisions did rise, to £2.1m from £1.2m a year previously, which I think stresses the current tough business outlook. That’s very possibly behind the 9% fall in the share price on the day, though the shares did spike up in the days ahead of the results.

Despite the weak sentiment, the City’s analysts are very positive about 1pm, forecasting a 17% EPS rise for the full year, followed by a further 8% the next year. That puts the shares on forward P/E multiples of just 6.9, falling to 6.4, with PEG ratios standing at 0.4 and 0.8 respectively

I don’t want to downplay the risk, but that looks like a favourable growth valuation to me, and I think full-year results could well bring about a re-rating.

Overheated?

By contrast, the FTSE 100‘s biggest climber of the past 12 months shows all the signs of an early growth phase pushing a share price up to what I see as dangerously high.

The company is NMC Health (LSE: NMC), and it’s one I’ve been bullish about for quite some time. The healthcare chain, based in the United Arab Emirates, has recorded several years of accelerating EPS growth, as it taps into a very large potential market.

That’s backed up by forecasts for strong double-digit growth for 2017 and the next two years, but we’re looking at a pretty hefty share valuation.

Stunning rise

NMC shares have almost doubled in the past 12 months, quadrupled in two years, and have put on an amazing 1,300% over five. At 3,098p today, they’re on a P/E based on 2017 expectations of 42. That’s nowhere near as high as some overheating growth shares have gone, and analysts are expecting it to drop to 23 by the end of 2019.

I still think NMC is a good long-term investment, but to me the shares are looking fully valued at the moment, and I think there’s significant downside risk should a set of results come in below expectations in the next year or two. That often happens with popular growth stocks, and it does heighten the short-to-medium-term risk.

I see the growth of NMC shares at least flattening off a little now, and I reckon there are growth shares out there that should beat it in 2018.

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Alan Oscroft 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 us better investors.

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