If you’re looking to generate high returns on your money, it can be worth looking outside the FTSE 100 and allocating a small proportion of your portfolio to higher-growth smaller companies. Smaller firms are more risky, in general, than large-cap FTSE 100 companies, however, they can also provide much higher returns. A couple of winners can really boost your overall portfolio performance.
With that in mind, here’s a look at two FTSE 100-beating high-growth smaller companies that I believe offer compelling investment potential.
dotDigital (LSE: DOTD) is a technology company that specialises in email marketing. Its key product dotDigital Engagement Cloud (previously known as Dotmailer) is an advanced email marketing platform that enables companies to create, test, and send data-driven automated email campaigns, and provides access to rich insights in real time. Designed to ‘empower’ marketers, Engagement Cloud is already used by over 4,000 brands worldwide, including names such as Barbour, Virgin Active, and T.M. Lewin.
Dotdigital has grown significantly in recent years and half-year results released this morning show that the group is still growing at an impressive rate. For example, for the six months to 31 December, group revenue grew 33% (organic revenue was up 15%) and group adjusted EBITDA surged 25%. Furthermore, the group’s cash balance at the end of the period climbed nearly 60% and a dividend hike of a healthy 16% was declared.
After a strong run between 2015 and 2018 where the share price surged around 230% (smashing the FTSE 100), the stock has consolidated its gains over the last 12 months. As such, I believe now could be a good time to get in, before it has another upward run. It’s up 5% today so could this be the beginning of the next leg up? The stock’s forward-looking P/E ratio of 24.2 seems fair to my mind, given the company’s growth.
Another small-cap that I like right now is Alpha FX (LSE: AFX), a little-known company that specialises in FX hedging services for small and medium-sized corporate clients. Its customers currently include well-known names such as ASOS, Halfords, and Jamie Oliver yet according to Alpha, it has only penetrated a tiny proportion of its addressable market, meaning that there could be plenty of growth to come.
Like DOTD, this is a company that is growing quickly. For example, in its interim report in September, the group reported revenue growth of an impressive 55%, as well as underlying operating profit growth of 29%. Furthermore, in an update on 3 January, the group advised that recent trading has been strong and that it expects earnings for the full year to be above market expectations. What’s also impressive about AFX is that operating margins and return on equity are high, which indicate it’s a highly profitable company.
Analysts currently expect the group to generate earnings of 25.2p per share this year, which puts the stock on a forward P/E of 26.2. I think that’s a reasonable price to pay for this high-growth niche company. If the business can keep on-boarding new customers, I believe there is potential for significant upside here.
Edward Sheldon owns shares in dotDigital Group and Alpha FX. The Motley Fool UK has recommended dotDigital 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.