When looking for stocks to buy, most investors start their hunt with the UK’s leading index, the FTSE 100 because this is where the biggest and best companies can be found.
However, it’s in the small-cap arena where the market’s best growth stocks usually reside. But due to the risks of investing in small-caps, investors often overlook this part of the market.
Nevertheless, there’s one small-cap I’ve recently stumbled across, which looks to be a hidden growth champion.
Hidden growth stock
Since its IPO in March 2016, Harwood Wealth Management (LSE: HW) has wasted no time making an impact on the market. The UK-based financial planning and discretionary wealth management business has a market capitalisation of only £106m, but it already administers £4.3bn of assets, up by around a third since the end of April last year.
Asset growth is going straight to the bottom line. The wealth management business has high operational gearing, which means there are high fixed costs to begin with, but once profitability reaches a certain level, and costs are covered, margins on every additional £1 of revenue are significant. For example, Harwood’s net profit margin was just 1% in 2016. Thanks to revenue growth and economies of scale, City analysts expect the group to report a net margin of 8.3% this year.
To capitalise on its existing size and established business base, Harwood is growing through acquisition. For the six months to the end of April, the firm spent £10.9m buying nine other wealth management businesses. Not only have these deals boosted profitability, but they’ve also given it more financial firepower to chase even more acquisitions.
Considering the group’s aggressive growth plans, it is no surprise City analysts expect it to report earnings per share growth of 463% for 2018 (giving a full-year P/E of 23.6) and 27% for 2019 (forward P/E of 18.5). In my opinion, this growth makes the stock highly attractive, and I see no reason why the business cannot continue to grow at a similar rate for many years to come.
It is this growth potential, coupled with the stock’s modest valuation that leads me to conclude that Harwood could be one of the best growth stocks around.
Bigger is better?
If it continues on its current growth trajectory, it could one day end up on a par with FTSE 100-listed wealth management group St James’s Place (LSE: STJ).
St James’s is going from strength to strength. After a strong 2017, new clients continued to flock to the firm’s offering during the first quarter with net inflows jumping 31%, to £2.6bn.
Not only does St James’s have a solid reputation for investing clients’ money successfully, but the group also looks after its shareholders. As net profit has steadily increased, St James’s dividend per share has risen at an average rate of 32% over the past five years. City analysts are expecting at least double-digit payout increases for the next two years as earnings per share continue to expand (EPS growth of 74% for 2018 and 18% for 2019). Current projections suggest yields of 4.3% and 5% are on offer for the next two years.
A forward P/E ratio of 22 times may seem demanding, but I reckon this is about right considering the group’s potential and historical growth.
Rupert Hargreaves owns no share 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.