The Motley Fool

2 promising small-cap growth stocks worth watching in February

With concerns over the health of the global economy spreading over the last few months (not to mention the perpetual ‘elephant in the room’ that is Brexit), searching for promising growth stocks feels decidedly contrarian at the moment. Nevertheless, I think it’s still worth doing, particularly if further wobbles in the markets help to bring the prices of such stocks down to more attractive entry points.  

Here are two minnows that I think are worth keeping an eye on in February. 

Game on

£350m cap game developer and publisher Frontier Developments (LSE: FDEV) will report its interim financial results for the six months ended 30 November 2018 on 6 February. Based on this month’s trading update, management is likely to report “record” numbers thanks to the success of its third franchise — Jurassic World Evolution. 

The manage-your-own-dinosaur-park game has now sold in excess of 2 million units, most of which were downloaded rather than purchased from a shop. Elsewhere, Frontier’s other franchises, Elite Dangerous and Planet Coaster, “continue to perform well.

Revenue of roughly £64m for the six-month period was mentioned, which would be a staggering 236% improvement on that recorded the previous year. In addition to selling more games, Frontier’s strategy of providing free updates and additional content (at a price) as a way of keeping people interested in the titles would appear to be paying off.  

As far as the full-year is concerned, management remains “comfortable” with market expectations on revenue falling between £75m and £88m and believes this “should exceed the mid-point of this range“. 

Having more than halved in value in seven months, you might think Frontier’s stock trades on a tempting valuation. Unfortunately, it’s still far from cheap on a little less than 22 times forecast earnings. There are no dividends to speak of either, so those holding must pin all their hopes on capital growth for now.

Nevertheless. CEO David Braben’s promise to provide more information on the company’s fourth game franchise “in the coming months” could be a catalyst for the shares to move higher. The fact that less than 50% of the stock is actually available to the public could also accentuate any upside. 

US-bound? 

Also worthy of further research, in my opinion, is small-cap infection-prevention, contamination control, and hygiene product manufacturer Tristel (LSE: TSTL). The company is due to release its interim results on 25 February. 

Based on comments made in December’s AGM, the small-cap expects to report pre-tax profit of “no less than” £2.2m for the first six months of its financial year (ending in June 2019) — 10% higher than in 2018. Importantly, this takes into account Tristel’s recent purchase of Benelux distributor Ecomed Group but only one month of the latter’s contribution to revenue and profits.  

Having climbed to as high as 342p last summer, the stock is now pretty much back to the price it was one year ago (275p). Like Frontier, however, Tristel is most definitely not a stock for value hunters.

A forecast price-to-earnings (P/E) ratio of 27 suggests a lot hinges on the company’s ability to build a presence in the US. The process of getting the necessary regulatory approval for its products is “progressing as planned“, according to CEO Paul Swinney,

Should approval be given, the upside could be huge. For now, however, you’ll need to pay a premium for a chance to enjoy that ride. 

Capital Gains

In the meantime, one of our top investing analysts has put together a free report called "A Top Growth Share From The Motley Fool", featuring a mid-cap firm enjoying strong growth that looks set to continue. To find out its name and why we like it for free, click here now!

Paul Summers 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.