Looking for companies exhibiting signs of above-average growth? Here are two great examples from lower down the market spectrum that I’ve added to my own watchlist over the last couple of weeks.
With a market capitalisation of just £80m, it’s not surprising if many market participants are unfamiliar with bio-decontamination and containment equipment supplier Bioquell (LSE: BQE). This could be all set to change.
Over the last year, the Andover-based company’s stock has climbed almost 170% in value — yet another demonstration of just how profitable small-cap investing can be if you pick the right stocks at the right time.
While some may claim that the ‘easy money’ has already been made, I’m not so sure. Based on recent trading, it looks like positive momentum seen over the last six months could continue for some time to come.
This month’s trading statement revealed that revenues for the 2017 financial year would be ahead of management’s previous expectations at roughly £29.3m — a 9% rise on the £26.8m achieved in 2016. Even better, the company now predicts that its pre-exceptional earnings before tax will now be significantly ahead of market expectations.
Aside from these encouraging numbers, Bioquell boasts a solid balance sheet with a net cash position of £14.5m at the end of last year. Free cash flow has become healthier over the last couple of years as a result of a reduction in capital expenditure. There’s no dividend right now but this is perhaps to be expected.
Bioquell confirms its full-year numbers in early March. With its relatively small free float (the proportion of shares in the hands of investors), expect further good news to push the share price firmly onwards and upwards.
E-learning solutions provider Learning Technologies (LSE: LTG) is another company that’s put in solid gains recently. Its shares have already climbed 55% in value since I last looked at the company in September.
As a result of “exceptional” organic growth and a contribution from a new acquisition, last week’s pre-close update revealed that group revenue would now come in no less than £51.8m — an 83% rise on the £28.3m achieved in 2016. Adjusted earnings before interest and tax (EBIT) are also expected to be “materially ahead” of market expectations of at least £14m — a 100% increase. Based on current performance, it seems the company is well on the way to realising its goal of delivering run-rate revenues of £100m and run-rate EBIT of £25m within the next three years.
With the company’s order book becoming increasingly populated with blue-chip firms and national governments, a promising pipeline of acquisitions and £1m in net cash at the end of December (compared to 38.5m of net debt at the end of 2016), Learning Technologies looks an ideal pick for risk-tolerant growth aficionados.
Like Bioquell, the company will provide its full-year figures to the market in March.
Only your watchlist?
So, why not simply buy the shares if I’m keen on them? In a word, valuation.
Thanks to their superb performance over recent months, neither Bioquell nor Learning Technologies come cheap. At 31 times and 39 times forecast earnings respectively, a lot of good news appears already priced-in, suggesting that it might be prudent for prospective investors to consider waiting for short-term traders and early holders to depart with their profits before building a position.
Make no mistake
Given that high expectations are often correlated with a high risk of disappointment on the stock market, buying shares in any company without paying attention to its valuation is often a recipe for disaster.
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Paul Summers 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.