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I think these 3 small-cap growth stocks are the real deal. But are they too expensive?

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Bought at the right time and the right price, small-cap stocks can do wonders for your wealth.

Today, I’m looking at three great examples, all of which report to the market next month. 

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Gaming for growth

Cambridge-based video games developer and publisher Frontier Developments (LSE: FDEV) releases interim results on 5 February. From a business perspective, I doubt those already holding have much to fear.

Earlier this month, the company indicated that total revenue for the six months to the end of November would be £32m – a 28% rise on that achieved over the second half of the previous financial year. That said, it’s worth mentioning that this would be significantly less than the near-£65m achieved over the same period in 2018, highlighting the extent to which sales in this industry can fluctuate according to when games are released.

Having “performed well” over the festive period (and based on the initial success of Planet Zoo – its fourth franchise), Frontier’s management now believes full-year sales will come in within analyst expectations of between £65m and £73m. 

Boasting a strong net cash position and rising returns on capital, this is the sort of company I’d usually get in line to buy. On an eye-watering forecast price-to-earnings ratio of 54, however, a lot of the good news looks firmly priced in.

With shares up 40% in just six months, I’m inclined to wait and see if results day brings out the profit-takers.

In a sweet spot

Another small-cap reporting next month (25 February) is chocolatier Hotel Chocolat (LSE: HOTC).

Like Frontier, the AIM-listed firm enjoyed a sweet 2019, with its share price soaring almost 60%. Hotel is also generating great sales momentum, announcing last week that total group revenue over the 13 weeks and 26 weeks to 29 December had climbed 11% and 14% respectively. 

The company is also growing its presence, both in the UK (nine new stores were opened over the second half of 2019) and abroad (four sites in the US and five in Japan). It boasts over 1.1 million active members in its VIP-Me scheme and is even targeting the vegan market with its new Nutmilk chocolate – deemed an “immediate hit” by management. 

Talk of “modestly higher” costs “due to inefficiencies in the supply chain” may explain why the shares took a temporary dive last week but I think it’s more to do with the valuation – a very steep 44 times earnings.

It’s a great business but I’m conscious that no stock is worth buying at any price, especially a high street retailer.

Cleaning up

A third small-cap showing great positive momentum of late is infection prevention and contamination control product manufacturer Tristel (LSE: TSTL).

December’s AGM statement from the Snailwell-based business was brief but highly encouraging for those already holding.

Thanks to contributions from recent acquisitions, management reported that pre-tax profit for the first half of the financial year would be “no less than £2.8m” (£2.4m was achieved over the same period in 2018).

This, combined with news that its push for regulatory approval for its products in the US was “progressing well” has only served to send the shares higher.

Like both Frontier and Hotel Chocolate, however, the valuation is looking frothy at 33 times forecast earnings. Having climbed 85% since November, I have my doubts about whether the stock can maintain its current momentum.

Half-year numbers will be confirmed on 24 February.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Hotel Chocolat. 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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