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I think these multi-bagging growth stocks show the power of buying small

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There are few things more satisfying as an investor than finding a promising small-cap stock that few professional fund managers are looking at, doing the necessary due diligence, taking a position, and then being proved right further down the line.

Today, I’m looking at two such examples, one of which has just released its latest set of results to the market.

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Overseas growth

I last looked at global identity data intelligence business GB Group (LSE: GBG) in July. Since then, investors have continued to bid the share price up another 12%, demonstrating why buying pricey stocks with great momentum can still be a winning strategy.

This gain is nothing, however, compared to what some long-term investors will have achieved. Had you purchased the stock five years ago and done nothing, you’d be sitting on a gain of around 350%. Based on today’s numbers for the six months to the end of September, I wouldn’t be surprised if those invested for years rather than months continued to benefit. 

Thanks to “strong organic performance” in all of its solutions (Location, Identity and Fraud) and a boost from recent acquisitions, revenue increased 62% to £94.3m over the period. Interestingly, overseas sales represented a larger proportion of total business (57%) compared to revenues from the UK for the first time. That’s encouraging, especially for those who have concerns about the state of the UK economy in the aftermath of Brexit (assuming it happens). Post-tax profit doubled to £5.7m. 

Importantly, this kind of performance looks set to continue. According to CEO Chris Clark, GB has performed in line with expectations so far in the second half of the year and management suspects the company will hit analyst expectations.   

Once again, however, I would caution anyone interested in only holding the shares temporarily to consider the valuation first. A great company isn’t necessarily a great investment if the price tag is too high. At almost 39 times earnings before markets opened this morning, a lot of positive news looks priced in. Upward momentum is all very well but it can quickly reverse if there’s a lack of buyers. 

Fantasy stock

Another stock whose share price has grown considerably over the last few years is fantasy figure maker Games Workshop (LSE: GAW). Actually, that’s something of an understatement. Go back five years, and the stock was trading around 500p. Today, the very same shares are priced at a staggering 5,800p!

Can this kind of growth be sustained? Quite possibly. The company still has a lot of what it labels “green field territory” to infiltrate around the world (particularly in Asia) and ways of exploiting its brand and intellectual property. And, as my Foolish colleague Roland Head reported earlier this month, recent trading has been nothing short of superb

Valuation-wise, Games Workshop now trades on 25 times earnings. That’s clearly not cheap, but I do think it’s justified based on the aforementioned growth potential and the fact the £1.9bn-cap makes the sort of operating margins and returns on invested capital that most businesses would kill for, including GB Group. It also has zero debt.

There’ll be some inevitable volatility on the way but, for me, Games Workshop continues to be a high-quality stock that deserves to be owned for the long term. 

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Paul Summers owns shares of Games Workshop. 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.

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