The Motley Fool

Could my top secret growth stock be a millionaire maker?

The small-cap universe is the natural hunting ground for investors seeking stocks with high growth potential. Indeed, though few and far between, the most successful smaller companies are capable of producing returns that can transform a relatively modest investment into £1m or more.

My Foolish colleague Kevin Godbold has recently discussed a small-cap, whose earnings have soared more than 2,000% over the last five years, and which is now looking to crack the US market. Meanwhile, fellow Fool writer Paul Summers has his eye on both a medical technology firm and a data solutions provider that are flying under the radar of most investors.

My top secret growth stock

One of my current favourite growth stocks — FTSE SmallCap-listed Tarsus (LSE: TRS) — not only flies under the radar of most investors, but also is likely overlooked by many dedicated growth hunters.

For one thing, it’ll never appear on a stock screen with parameters set for both historical and forecast year-on-year earnings growth. And for another, if you stumbled across it among those five-year company earnings records you find on investment websites, you’d probably instantly dismiss it, due to the seemingly crazy annual swings in its earnings.

However, there’s a very good reason for the annual earnings volatility. And if you look behind, you’ll see what I believe is a very attractive growth stock.

Biennial cycle

Tarsus, which released its latest annual results today, is an international business-to-business media group. Its core revenue comes from a portfolio of exhibitions that bring buyers and sellers together. Ancillary sources of revenue include conferences, educational programmes and online products related to the exhibitions.

Now the thing is that many of the biggest of these exhibitions, such as the Dubai Airshow and Labelexpo Europe, are biennial. The cycle happens to be such that Tarsus has more business in odd-number years than in even-number years. You can see this clearly in the progression of earnings per share (EPS) in the table below.

  2013 2014 2015 2016 2017 2018
EPS 20.0p 12.7p 21.4p 15.2p 27.7p 17.5p
Annual growth +64% -37% +69% -29% +82% -37%
Biennial growth +18% +4% +7% +20% +29% +15%

While annual EPS has been up and down like a dog at a fair, biennial growth has been consistently positive. It’s also been strong, the average working out at over 15%. In other words, hidden behind the annual earnings volatility is a nice underlying growth business.

Quickening the pace

In 2013, Tarsus launched the first phase of its Quickening the Pace strategy, under which it targeted expansion in high-growth geographies and high-growth industries. It reckons “total shareholder return over the period [2013-17] was 111%, approximately 50% better than our peer group.”

Today’s results for 2018 represent a strong first year in the second phase of the strategy, under which “the group will deepen its presence in higher growth markets; look to maximise the scale of existing events; and acquire new platforms for growth.”

Attractive valuation

The shares are trading at 298p (11% up on the day), as I’m writing. Averaging the last two years’ EPS gives 22.6p, and a price-to-earnings (P/E) ratio of 13.2. Meanwhile, an 11p dividend (a 10% increase on last year) represents a running yield of 3.7%.

Tarsus may not have the exponential growth and rapid millionaire-maker potential of riskier, more ‘blue-sky’ small-caps, but I believe the current valuation is attractive and that it could be a very rewarding growth stock to buy today and hold for the long term.

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!

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tarsus 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.