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I think this small-cap share has the potential to outperform the market

I think small-cap company The Mission Marketing Group (LSE: TMMG) is a decent example of a share with the potential to help investors outperform the market, but it does come with the normal risks associated with small-caps, of course.

Even on today’s 7% rise on the release of the full-year results, the market capitalisation is only around £54m, although this means it’s just crossed the threshold of £50m that would put the share on many more investors’ radars.

But smaller firms are known for their volatile share prices, and we often see sharp movements in both directions. Nevertheless, I’m comfortable with holding shares with smaller market capitalisations as long as I choose carefully, diversify, and weight my holdings sensibly.

Growing well

The key attractions for me are a modest valuation, decent operational momentum, and a reasonable showing on quality indicators. There’s also a dividend yield running close to 3% with the payment having grown by 110% over the past five years.

The firm makes its living in marketing communications and advertising with strong input from technology. In other words, Mission Marketing is plugged into the digital world. The company website explains that 16 marketing agencies make up the business operating in the UK, Asia and the US, and the directors let each of the agencies “think for themselves.” Such an approach reminds me of well-known investor and company boss Warren Buffett’s philosophy, which is no bad thing because Buffett’s Berkshire Hathaway has been phenomenally successful over the years.

During 2018, the figures for trading from continuing operations show that revenue rose 13%, adjusted earnings per share shot up 24% and borrowings plunged 44% to £4m. This outcome represents some eight consecutive years of growth from the company, and the directors stamped their seal of approval by pushing up the total dividend for the year by a chunky 24%. To me, that indicates that they have confidence in the outlook. Indeed, 2019 is off to a good start, and chairman David Morgan said in the report he has the confidence to believe that 2019 will see this momentum continue.”

Big-name clients

In 2018, the company attracted some well-known names as clients such as Amazon, HP, Petro-Canada Lubricants, Lindt, Muller, Diomed, Barclays and Aviva. However, I’m mindful that there is likely to be a high degree of cyclicality in the company’s operations. We could see a downturn in business at some point if the wider macroeconomic environment deteriorates. I think that’s one reason for the low valuation the stock market has assigned to the company.

However, Mission marketing is growing now and expects a mid-single-digit percentage advance in earnings this year. I’m tempted to pick up a few of the shares as part of my diversified portfolio to see what happens from where we are now. But another approach to participating in the potential of smaller companies would be to buy into a tracker fund that follows small-caps. Whether you go for an individual share like Mission Marketing or a fund, be sure to do your own research first.

Hidden Opportunity

The Alternative Investment Market (AIM) boasts the enviable record of being the most successful growth market in the world – so it makes sense to go digging for gold there, right? Well, plenty of companies have listed there and lost…

However, one strategy for capturing capital gains is to invest in expanding firms that have already proven their mettle with rising revenues, earnings and cash inflow – and we believe we’ve identified a small-cap winner with lots of ongoing growth potential in our recently refreshed report, “A Top Small-Cap Share From The Motley Fool”.

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Kevin Godbold has no position in any share 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.