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Two stocks that could put UKOG’s returns to shame

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Despite a violently see-sawing share price and heaps of unrealised potential, UK Oil & Gas continues to be one of the more popular small-caps among domestic retail investors. While UKOG could prove doubters (like myself) wrong and succeed where numerous other small-cap UK oil & gas producers have failed, I’d sooner consider two proven small-cap growth stars.

Florals and bright wellies are big business

First up is clothing retailer Joules (LSE: JOUL) which, after going public in mid-2016, has returned over 55% to shareholders on the back of consistent sales and profit growth. This growth has come through opening new outlets in the UK, selling more of its goods on its website, and expanding wholesale arrangements with department stores in the UK and US.

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Last year, this three-pronged growth strategy led to revenue rising 18.4% to £185.9m, with underlying EBITDA up 24.4% to £21.2m. Considering the size of the global clothing market and the high demand at home and overseas for quintessentially British designs, like those Joules sells, I reckon there’s plenty of growth left in the tank for the group.

I also like the fact that the group’s founder, Tom Joules, remains in control of the creative side of the business and owns 32.1% of outstanding shares. In my eyes, this is a great set up as it allows Mr Joules to focus on what he does best, while also ensuring the rest of the business is run by experienced professionals.

Joules’ shares aren’t cheap, at 22 times forward earnings, but for a well-run business that’s experiencing double-digit growth and is already highly profitable, I think this is a very fair price to pay.

A homegrown cyber security play

But if investing in floral print dresses aren’t your style, identity verification expert GB Group (LSE: GBG) maybe more your style. GBG is growing quickly due to the increasing need of businesses to verify who their customers are online in order to combat fraud and maintain compliance with increasing regulatory mandates.

Last year, good organic growth and acquisitions propelled the group’s revenue up from £87.5m to £119.7m. Meanwhile, increasing benefits-of-scale and the high-margin nature of its work, meant operating margins rose to 22%, with adjusted operating profits hitting £26.3m.

Looking ahead, the group’s net cash position, and cash-generative operations, provide plenty of firepower to continue expanding at a double-digit clip through organic expansion and further purchases. And, with demand for identity verification services likely to continue growing at a tremendous clip for years to come, I reckon GB Group has plenty of growth potential over the long term.

The group’s valuation of 41 times forward earnings estimates show I’m not the only one expecting big things from GB Group. But with big sector-wide tailwinds at its back, and an attractive business model that boasts high levels of recurring revenue and steadily improving margins, I think this could be a very fair price to pay.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Joules Group. 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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