While I own a number of large-cap British stocks, I believe small- and mid-cap stocks are generally the best UK shares to buy. History shows that shares in these areas of the market tend to outperform the large-cap stocks.
Here, I’m going to highlight two UK mid-cap stocks I’d buy for my own portfolio today. Both have generated strong returns for investors in recent years, and I think they will continue to reward investors in the long run.
5-year revenue growth of 540%
The first stock I want to highlight is Keywords Studios (LSE: KWS). It’s a leading provider of technical services to the video gaming industry. It serves nearly all of the major players in gaming including Electronic Arts, Activision Blizzard and Microsoft.
The reason I’m bullish here is that the video gaming industry is booming right now. Believe it or not, gaming now brings in more revenue than the movie and music industries combined. Looking ahead, this industry is only going to get bigger. Experts believe that by 2027, the industry will be worth around $300bn, up from around $150bn last year. KWS should benefit from this industry growth.
Keywords has grown at an incredible pace over the last five years (revenue growth of 540%) and an update earlier this week showed the company still has plenty of momentum. The group said it has made a “very good start to the year” with total revenue growth of 36% for the first four months of 2021.
There are a few risks to the investment case here. One is in relation to management. This week, the company announced CEO Andrew Day would be stepping down with immediate effect due to health reasons. This adds some uncertainty.
Another is the high valuation. Currently, the stock has a forward-looking P/E ratio of about 38. That doesn’t leave a huge margin of safety. If growth stalls, the stock could take a hit.
Overall, I’m very bullish on KWS however. It’s worth noting that yesterday, Jefferies raised its target price to 3,450p from 3,382p – that’s about 40% higher than the current share price.
A UK stock for the digital world
Another UK growth stock I’d buy today is GB Group (LSE: GBG). It’s a leading provider of identity management and fraud prevention solutions. Some of the world’s best-known businesses, including the likes of HSBC, Betfair, and Vodafone, rely on the company to provide digital identification services and keep business ticking along.
Like Keywords, GB operates in a high-growth industry. According to MarketsandMarkets, the identity verification market is expected to grow from $7.6bn in 2020 to $15.8bn by 2025. That represents an annualised growth rate of 15.6%. Growth is set to be driven by more digitalisation initiatives and combating an increase in fraudulent activities and identity theft.
GB published its full-year results for the year ended 31 March earlier this week and the numbers were impressive. Organic revenue was up 12.1% while profit before tax was up 66%. The group also said it’s made a good start to this financial year.
This is another stock that’s quite expensive. Currently, it trades on a forward-looking P/E of around 44. That’s high by UK standards and adds some risk to the investment case. That said, I don’t think it’s that unreasonable, considering the valuations of US tech stocks at present.
Edward Sheldon owns shares in Keywords Studios, GB Group, and Microsoft. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Activision Blizzard and Microsoft. The Motley Fool UK has recommended Electronic Arts, HSBC Holdings, and Keywords Studios. 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.