Over a long-term investment horizon, smaller companies can generate astronomical gains. Just look at ASOS. A decade ago you could buy the shares for around 270p. Today, they change hands for over 7,500p. I’m still kicking myself for listening to a broker friend of mine, who advised me in 2008 that I had missed the boat.
With that in mind, today I’m looking at two exciting small-cap companies that are growing at a healthy rate. Will you regret not buying these stocks in a decade?
Smart Metering Systems
Smart Metering Systems (LSE: SMS) installs, owns and operates gas and electricity meters throughout the UK for domestic, industrial and commercial customers. The company is an expert in the installation of smart meters and is therefore well placed to benefit from the UK government’s target to have smart meters in every household by 2020.
SMS floated back in 2011 at 60p per share and the stock has been a spectacular investment since, generating capital growth of over 1,000%. Can the shares keep performing? Let’s take a look at today’s results for clues.
For 2017, revenue came in at £79.6m, up 18% on last year, and beating analysts’ estimates of £78.1m. Total annualised recurring revenue increased 38% to £57m. On an underlying basis, earnings per share rose to 19.93p, up from 19.66p last year. Impressively, the company was able to pay down its debt pile from £94m to £37m and hike its full-year dividend by a huge 27% to 5.2p per share.
Chief Executive Alan Foy was upbeat about the company’s prospects, stating: “2017 has been a year of investment in our business – building capacity to grow and deliver for our customers, particularly in the domestic smart meter rollout. We enter 2018 with a solid financial platform and are well positioned to continue making progress in our core markets.”
Today’s results suggest to me that the growth story here remains intact. The shares don’t come cheap unfortunately (a forward P/E of 33.6), but given that the stock is down 20% this year, now could be a good time to take a closer look.
Another small-cap stock I’m bullish about is identity specialist GB Group (LSE: GBG). The £650m market cap group helps companies and governments verify identities and protect themselves against fraud, cybercrime and financial loss.
Identity fraud is a significant problem all over the world and GB Group is benefitting as a result. Over the last three years, revenue has surged from £42m to £88m and net profit has increased from £3.5m to £10.8m. For the year ended 31 March, analysts expect revenue and net profit to hit £117m and £18.4m respectively. Half-year results released in November revealed strong momentum, with adjusted earnings per share rising 69%.
The valuation here isn’t cheap either, with the shares trading on a forward-looking P/E of 34.9, but given the growth potential, I can see GBG’s share price moving considerably higher over the long term.
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Edward Sheldon owns shares in GB Group. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Smart Metering Systems. 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.