The Motley Fool

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

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Restore

£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.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.