Investors have enjoyed fantastic returns with catering group Compass (LSE: CPG) over the past decade.
Indeed, since 2009, shares in the company have produced a total annual return of 19.7%, smashing the performance of the FTSE 100 over the same period. Including dividends, the UK’s leading blue-chip index has only returned 9.7% per annum since 2008.
It was this performance, coupled with the company’s market-leading position that led me to recommend Compass as one of my top stocks to buy for 2018 earlier this year.
And since my original article was published at the beginning of January, the outlook for the business has only improved. City analysts have nearly doubled their growth expectations for 2018 based on the group’s first-half numbers, and a languishing share price means this growth is now cheaper than it was at the beginning of 2018.
However, while I continue to believe that Compass is a great long term, buy-and-forget investment, the recent market volatility has thrown up some exciting bargains.
One of these bargains is small-cap retailer Gear4music (LSE: G4M). This online retailer of musical instruments has reported explosive growth over the past five years, with net revenue growing at a staggering 46% per annum.
It looks as if the business is on track to report another year of explosive revenue rises for 2018. Interim results for the six months to the end of August, published earlier today, show revenue growth of 36% year-on-year.
Unfortunately, it would appear as if this has come at the expense of profitability. The group’s gross margin declined to 22.7% from the 25% reported for the same period last year. A loss of £362,000 was posted compared to the previous year’s profit of £4,000.
Still, looking past these numbers, management is confident that the group can meet its full-year targets during the second half. “I am pleased to report that we have seen particularly strong revenue growth since 1 September 2018 alongside notable gross margin improvements on the H1 period,” Andrew Wass, CEO states in today’s trading update.
The company stops short of detailing its own internal targets for growth, but City analysts have the group reporting EPS growth of 56% for 2019, followed by an increase of 57% for 2020.
Time to buy
Based on these estimates, shares in G4M are trading at a 2020 P/E of 29.5 and PEG ratio of 0.8 after factoring in growth. A PEG ratio of less than one implies that G4M’s shares offer growth at a reasonable price, which is the primary reason why I like the company over catering behemoth Compass.
One of Compass’s most attractive qualities to investors is its size, although this is also a drawback because huge businesses tend to grow less than their smaller peers. I can’t see any reason why G4M won’t continue to experience revenue growth of 30%+ or more for the foreseeable future. The company is on track to report total sales of £110m this year, a tiny fraction of the overall £4.3bn European market for musical instruments and music equipment. The global market is estimated to be worth more than £11bn.
Put simply, it looks to me as if G4M’s story is just getting started, and for this reason, the stock looks to me to be a better growth investment than FTSE 100 catering stalwart Compass.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Compass 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.