The Motley Fool

These small-cap growth stocks deserve to trade at a premium

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Heart-shaped balloon
Image source: Getty Images.

Shares in online musical instrument and equipment seller Gear4music (LSE: G4M) were down slightly in trading today as the market digested the latest set of full-year numbers from the York-based business. Given that a few highly-rated retailers, like ASOS and Superdry, have endured a difficult few months, such a reaction could actually be regarded as fairly encouraging. Indeed, following its “transformational year of growth and investment,” I still think the small-cap’s shares are worth buying.

Still on song

With new distribution centres now fully operational and the numbers of active customers rising 39% to 475,000, revenue jumped 43% to £80.1m over the 12 months to the end of February. Just under £36m (45%) of this came from the company’s international markets, which now include the US.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

As a result of increased investment in staff, marketing and its customer proposition however, gross margin fell to a little over 25%. So while gross profit rose 34% to £20.32m, earnings before interest, tax, depreciation and amortisation (EBITDA) dipped 4% to £3.46m. Pre-tax profit fell 43% to £1.5m.

As Boohoo.com and the aforementioned ASOS have recently shown, companies working through a period of heavy capital expenditure often make previously bullish investors jittery. Nevertheless, those still holding Gear4music will likely be comforted by CEO and founder Andrew Wass’s comments that 2018/19 will be more returns-focused, “with the objective of delivering strong and sustainable revenue and profitability growth“.

To be sure, not everyone — including my Foolish colleague Roland Head — is a fan of the stock at its current valuation of 62 times forecast earnings. With a PEG of 1.3 however, one could argue that the shares still look a decent buy if management really is able to establish the company as the go-to musical instrument purveyor in Europe. I remain optimistic and continue to hold.

One to watch

Also reporting full-year results today was freight management service provider Xpediator (LSE: XPD)

Thanks to strong organic growth in all divisions (Freight Forwarding, Transport Services and Logistics & Warehousing), revenues at the 30 year-old business jumped 60% to £116.3m in 2017. Pre-tax profit also soared by 65% to £2.4m, albeit from a low base.

In addition to this, Xpediator raised £7.8m in new capital, secured “notable client wins” in Romania and the UK and made three acquisitions over the reporting period. In tune with its strategy of consolidating what remains a fragmented industry (and targeting e-commerce and fulfilment as growth areas in the current year), the firm also said that it has a “strong pipeline” of potential purchases going forward.

With signs that trading has continued to be buoyant over the last few months, Xpediator is starting to look like a very interesting proposition for those willing to venture into the small-cap universe.

A forecast price-to-earnings ratio of 16 for the new financial year means the stock isn’t exactly cheap relative to its peer group but — like Gear4music — the relatively low PEG ratio suggests investors will still be getting a good deal. The fact that the company has already started returning cash to investors (final dividend of 0.64p per share) is a positive sign, as is knowledge that substantial amounts of its stock still remain in the hands of its long-established management team.

The shares are already up 123% since listing on AIM back in August, bucking the trend experienced by many new entrants. I think there’s more to come. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Paul Summers owns shares in Gear4music. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.