Given the lack of exciting growth stocks in the FTSE 100, it can pay to look outside the index if your aim is to generate higher returns over the long term. Take a look in the small-cap area of the market and you’ll find plenty of fast-growing stocks that have delivered stunning returns in recent years and smashed the performance of the footsie.
Today, I’m profiling two smaller companies with strong growth potential that I believe could be of interest to long-term investors.
AdEPT Technology
£94m market cap AdEPT Technology Group (LSE: ADT) is a leading independent provider of managed services for IT, unified communications (linking devices), connectivity and voice solutions. Its tailored services are used by thousands of customers across the UK, including the NHS. The stock has performed exceptionally well recently, rising 24% over one year and 190% over five, yet I think there could be more gains to come in the medium-to-long term.
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AdEPT has enjoyed robust growth over the last five years (revenue CAGR 17.2%) and half-year results released today show that the company continues to have momentum. Indeed, for the six months to the end of September, total revenue increased 9.5% to £24.4m, adjusted earnings per share rose 11.7% to 14.5p, and the group increased its dividend by a healthy 15.3% to 4.9p per share. While these results perhaps aren’t as strong as some were hoping for (the shares are down 5% today), I think the numbers are solid in the current environment, as business spending is down due to Brexit uncertainty.
Looking at its metrics, there’s a lot I like about the stock. Return on equity is solid, averaging 23.5% over the last three years and dividend growth has been impressive, with the payout growing nearly 500% in just five years. The valuation looks attractive too, as the forward P/E is 12.7 and the P/E-to-growth ratio (PEG) ratio is just 0.64, which is very low. My only concern is debt, which is a tad high, and has increased in the recent half year. That’s something to keep an eye on. Overall however, I see considerable potential here.
dotDigital
Another small-cap that I like right now is dotDigital Group (LSE: DOTD). Its shares are up around 285% over the last five years.
Its key product is its email marketing platform ‘dotmailer’ – an advanced platform that enables companies to create, test and send data-driven automated email campaigns, and provides access to rich insights in real time. It’s worth noting that despite the rise of social media advertising in recent years, email remains a very popular marketing channel for businesses today, as it delivers a return of £39 for every £1 spent, according to the company.
Growth here remains strong, and in its most recent full-year results released in mid-October, the group reported revenue growth of 35% and adjusted basic earnings per share growth of 28%. Yet the shares have had a choppy year, due to concerns over GDPR earlier in the year and the recent small-cap/technology sell-off, and they can currently be picked up for 15% less than the price at the start of the year, on a forward P/E of 22.8. I think that’s a very reasonable price to pay for a slice of this high-growth business. As such, I rate the stock as a ‘buy’.
