2 ‘secret’ growth stocks with massive potential

With a relatively small market cap of £400m, IT security firm GB Group (LSE: GBG) isn’t a household name, but I reckon this fast growing company could be one day. That’s because GB Group is cashing in on the rapidly growing demand for its identity verification services for background checks, fraud detection, customer validation and marketing campaigns, among others.

As we see in the below table these offerings are increasingly popular with clients such as Ford, Barclays and HSBC concerned about fraud.

The company isn’t resting on its laurels either and is using internal R&D and acquisitions to constantly add to its list of offerings in order to increase its stickiness with clients. The latest of these additions includes ID Scan, the market leader in automating the process of biometric verification for banks, passports and e-commerce. It goes without saying that this is a high-growth sector due to security fears from companies and governments alike.

The growth in these markets and a stellar record of four straight years of double-digit earnings rises mean the market is unsurprisingly bullish on the company. And its valuation reflects this optimism with its shares trading at 31 times forward earnings.

But I still believe GB Group is a great stock to own for the long term with a proven management team, healthy balance sheet providing ammunition for further acquisitions, and huge organic growth potential. This is one secret growth stock I’ll be following closely.

Founders know best

Another little known small-cap primed to make waves is clothing retailer Joules Group (LSE: JOUL). The company’s high-quality classic floral prints and stripes aren’t competing with the newest designs from fast fashion retailers, but this is just fine with the 30-something demographic it’s targeting.

Indeed sales were up 16.2% year-on-year to £81.4m in H1 due to fast growing online sales, a presence in more department stores such as John Lewis, and new stores of it sown. And with just 107 stores at period-end there’s still plenty of room to expand in the coming years.

The company’s management team is also wisely moving into international markets at a gradual pace. Rather than over-extending itself with a slew of owned retail stores in a variety of new markets, it is instead introducing the brand through department stores and other wholesale customers.

The 39.3% year-on-year increase in international sales to £8.6m in H1 also suggest that the brand is finding success in marketing itself abroad as quintessentially British, much as other companies such as Cath Kidston have done.

The company’s shares are somewhat pricey at 26 times consensus forward earnings, but I believe Joules’ founder-led design team and extensive growth prospects at home and abroad is setting the firm up for a very bright future.