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Have £1,000 to invest? I think this growth stock could smash the FTSE 100 over the next three years

The last six months has been a challenging period for small-cap investors. As risk appetite declined in the last quarter of 2018, small-caps were hit hard with the FTSE AIM 100 index falling nearly 30% in the space of just three months.

While some smaller companies have shown signs of recovery recently, many promising businesses are still trading well below their 2018 highs. As such, there are some attractive investment opportunities around at the moment for risk-tolerant investors. With that in mind, here’s a look at one smaller company that I believe offers serious outperformance potential right now.

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£330m market-cap Restore (LSE: RST) provides services to offices and workplaces in the private and public sectors, specialising in document storage, document shredding, and workplace and IT relocation. Perhaps not the most exciting business model in the world, yet one that’s highly effective in generating consistent profits, nevertheless. The stock is a favourite of UK small-cap specialist Mark Slater – one of the best stock pickers in the business.

Restore shares have taken quite a hit over the last six months, falling around 40%. As a support services company, it appears investors have put the stock in the same basket as the likes of Carillion and Kier, which have struggled in the current economic environment. Yet looking at today’s full-year FY2018 results from Restore, I’m convinced the share price fall has been excessive. As such, I think a big rebound could be on the cards.

Strong growth

Indeed for the full year, revenue rose 14% and profit before tax climbed 20%. Earnings per share were up a healthy 12%, marking the ninth consecutive year of double-digit earnings growth. These are good numbers, considering the economic and political uncertainty the UK has experienced over the last year.

Furthermore, the company increased its dividend by a healthy 20% – which signals management is confident about the future. CEO Charles Skinner was upbeat about group’s outlook, commenting: “Restore remains well positioned to build upon the gains made in 2018, with the Group’s broad base of recurring revenues and strong cash generation providing a stable platform for continued growth.

Important services

What I think the market is missing about Restore is just how important its services are. For example, shredding may not sound exciting but, in reality, it’s a fundamental service that the majority of companies need. With data regulation becoming more stringent (GDPR) and identity theft on the rise, companies cannot afford to be complacent here.

It’s also worth noting that Restore enjoys a high degree of recurring revenues. As Slater has pointed out, its document storage services essentially generate an annuity stream as boxes are typically stored for many years.

Valuation offers upside potential

Looking at Restore’s current valuation, I believe there’s potential for significant upside. For FY2019, analysts expect the group to generate earnings per share of 27.8p, which at the current share price places the stock on a forward P/E of just 10.1. For a company that has increased its earnings by 62% and lifted its dividend by 88% in the last three years alone, I think that valuation is way too low.

In my view, the stock deserves to trade on a P/E of at least 15, which means there could be nearly 50% upside. As such, I rate Restore as a ‘buy’ right now.

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Edward Sheldon has no position in any 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.