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Forget Blue Prism, this growing small-cap could be a leader in the next bull run

What a fantastic run investors in robotic process automation specialist Blue Prism Group (LSE: PRSM) have enjoyed since the firm listed on the stock market in March 2016. At today’s share price around 1,550p (and falling), the shares are up an astounding 1,176% since the first day of public trading just two-and-a-half years ago. And they’ve been much higher, exceeding 2,500p as recently as September.

Great operational progress

The firm’s operational progress is the catalyst for the move up in the share price. Revenue is up around 300% since the company arrived on the stock market and operating cash flow runs close to £8m from almost nothing. The firm develops software robots to automate routine back-office clerical tasks and blue-chip customers are snapping it up. The potential in the market is huge, which reflects in Blue Prism’s robust revenue projections.

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However, there’s a problem. Speculation has driven the share price way ahead of events and that’s why we are seeing such a vicious correction now. Even at 1,550p, the price-to-forward-sales ratio is an eye-watering 18 for 2019, and no-one is suggesting that the company will turn a profit next year – profits could be years away if they arrive at all.

Don’t get me wrong, I think the underlying business is performing well and the firm seems to be capturing accelerating sales from a rapidly expanding market. However, with projected revenue for 2019 running close to £86m and the market capitalisation at £1.14bn, I think there is a significant disconnection between operational progress and the valuation.

Mark Minervini – one of the modern era’s most successful stock traders– would probably describe Blue Prism as a market leader because it was one of the shares that led the charge in the bull market we have just enjoyed. However, he cautions that each new bull market tends to start with new leaders and the old outperforming stocks rarely lead in the next bull market after a significant correction in the market.

Well placed for accelerating growth

Recent weakness in the market suggests we could be in for a significant correction, so maybe now’s a good time to look for new emerging growth stories and I’d like to put forward for consideration Volution Group (LSE: FAN). The company designs, manufactures and distributes ventilation products to the residential and commercial construction markets in the UK and northern Europe.

That’s not a business that is as sexy as Blue Prism’s, but I reckon we need to look at new sectors to find the next leaders. I’m bullish on the world’s economies after our 10-year crawl out of recession and austerity following last decade’s financial crisis, and it makes sense to me that firms doing useful things will be in demand, so Volution fits the bill.

And today’s full-year results demonstrate that progress has been good. Revenue rose more than 11% compared to the previous year and adjusted earnings per share moved nearly 7% higher. The directors expressed their confidence in the outlook by pushing up the total dividend by 7%.

After completing four acquisitions in the period, I think the firm is well-placed to grow organically from here. Best of all, the forward price-to-earnings ratio sits below 11 for 2019, leaving plenty of room for a valuation re-rating if earnings take off as hoped. I think the stock is attractive.

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Kevin Godbold 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.