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What I’d buy instead of this 2,880% outperforming growth share

Those holding shares in GB Group (LSE: GBG) have enjoyed a fantastic ride. Since the beginning of 2010, the share price has risen more than 2,880%. Returns like that are what many investors dream about, and it proves that buying and holding shares for the long haul can work out very well indeed!

The performance in the stock was driven by the underlying growth and operational progress in the business. The firm is an identity data intelligence specialist with global operations, and revenue, earnings and cash flow have been notching up double-digit annualised percentage increases for years.

Good figures

Today’s full-year results report contains more good news. Revenue increased by almost 20% compared to the previous year and adjusted earnings per share moved 19% higher. The directors expressed their ongoing confidence in the outlook by pushing up the final dividend for the year by just over 16%.

Chief executive Chris Clark explained in the report that GB’s success boils down to its ongoing investment in “three core solutions,” which led to “exciting product innovation and deeper geographical reach.” The firm targets both organic and acquisitive growth and the outlook is positive for both.

Operationally and strategically, GB looks attractive to me and I can’t argue with the reassuring growth numbers the company pumps out. The firm is operating in a new and growing sector and seems well placed to grow much more in the years to come. But the stock presents me with a dilemma. The success story here is well known in the investing community and part of the rise in the share price over the years has occurred because of a valuation up-rating.

Highly rated

Today’s share price close to 620p puts the forward-looking price-to-earnings rating for the trading year to March 2020 at just under 37. Perhaps the company is worth its rating if you view it as a mark of quality, but buying shares on a valuation like that does introduce risk into the investing process, in my view. If the growth projections equalled or exceeded the rating, I’d feel more confident about buying, but City analysts following the firm expect earnings to grow less than 20% that year.

One way of handling the situation would be to take a long-term view and buy the shares anyway, but you’d need to be very confident about the firm’s potential for future growth to do that. Another method would involve waiting for a short-term operational set-back to knock the price, or a general market downturn before buying, which is the kind of approach to the dilemma I favour.

In the meantime, this is one of those occasions where I’d rather invest in the wider market than in this individual share by putting money into an index tracker fund such as one that follows the fortunes of a basket of small-cap firms.

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”.

Further still, we’re giving away this research free of charge! Click here now to obtain your copy.

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.