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One big reason I’d consider buying these two small-cap growth stocks

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When scrutinising promising stocks to help you on your way to financial freedom, it’s worth taking the time to discover the extent to which senior executives are invested in the companies they run.

The thinking behind this is simple. While nothing can be guaranteed in terms of performance, these people will arguably be more incentivised to achieve good returns when their own capital is at risk.

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With this in mind, here are two examples from the small-cap universe where those in charge also feature prominently in the list of significant shareholders. 

In the wars…for now

I’ve had my eye on cosmetics firm Warpaint London (LSE: W7L) for a while now.

One of the first things to attract me — aside from the seriously high operating margins and fairly resilient industry of which it is a part — was the knowledge that joint CEOs Samuel Bazini and Eoin Macleod owned just over 45% of the company between them.

It would seem some have gone cold on the stock, however. Despite being initially embraced by investors following its IPO, Warpaint’s share price is now down almost 40% from the highs achieved in May last year. This feels a little harsh considering last week’s far-from-awful full-year results.

Revenue rose 15.6% to £31.2m in 2017, with sales of the company’s W7 brand climbing 17.1% in the UK and 16.8% in overseas markets.

The aforementioned adjusted operating margin fell slightly to 24.4% from 25.2% but this is still more than satisfactory. Under the bonnet, Warpaint’s finances also look solid with a net cash position of £2m at the end of the year. 

According to Chairman Clive Garston, the £150m cap has made a “promising start” to 2018 with trading being in line with (heavily-invested) management’s expectations. The acquisition of Retra Holdings back in November for £18.2m should also provide a significant boost to earnings going forward.

Indeed, estimates of 13.1p per share being achieved in 2018 leave the stock on a price-to-earnings ratio (P/E) of just 14. For a growth company, that looks very reasonable. The forecast dividend yield of 2.9% is a modest (but welcome) extra. 

Lock in for profits

Small-cap self-storage firm Lok’n Store (LSE: LOK) is another stock that’s made its way onto my watchlist, partly because CEO Andrew Jacobs owns almost 19% of the company.

I’m a big fan of companies like this since the business model is easy to understand and, although the market is competitive, our love of ‘stuff’ means demand looks like it’s only going one way.

Highlights from last week’s interim results (covering the six months to the end of January) included a 5.7% rise in revenue (to £8.82m) and 16.3% jump in group adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to £3.85m. Adjusted pre-tax profit soared 21.3% to £2.55m. 

This could be just the start. According to Jacobs, the company is using its “robust balance sheet” to build more stores in what remains a “structurally under-supplied market“. Two were opened over the reporting period, another two added to the pipeline and four more sites are “currently with lawyers“.

At the time of writing, Lok n Store’s stock trades on a valuation of 33 times earnings, suggesting a lot of this growth is firmly priced in. Nevertheless, I’ll be keeping the firm on my radar in the hope that a better entry point appears following a wobble in the general market.

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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.

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