Today I’m looking at two very different small-cap growth stocks, both of which I believe could outperform expectations.
Racing ahead?
The first of these companies is the former owner of The Football Pools, Sportech (LSE: SPO), which released half-year figures today.
Sportech is building a technology-focused sports betting business. This has two main parts. It operates sports betting venues in Asia, Europe and North America, and provides the world’s most widely-used tote-based betting software for horse racing bookmakers.
The company is also loaded with spare cash. As a result of a VAT refund and the recent sale of The Football Pools, it had net cash of £76.2m at the end of June, compared to a market cap of £179m. The company has already returned £21m to shareholders this year, and has plans to return more cash, up to a maximum of £55m.
This is appealing, but I believe investors need to look beyond the cash and focus on the group’s continuing business. Today’s half-year results show that revenue from continuing operations rose by 5% to £36.4m during the six months to 30 June.
The group’s earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 5% to £3.9m. Looking at the figures in more detail, a fall in software sales seems to have been offset by an increase in recurring service revenues.
Sportech shares have risen by 41% over the last year and the group is cashed-up to fund acquisitions and expansion. But my concern after reading today’s report is that there’s not much evidence of underlying growth. Does the share price reflect this?
Analysts are forecasting adjusted earnings of 3.2p per share for 2017. After stripping out the group’s net cash, this gives an effective P/E of 17. That actually seems fairly reasonable. If Sportech’s growth plans are successful, the shares could deliver decent gains. I’d hold after today’s news.
A wizard buy for smart investors?
A publisher of printed books isn’t an obvious choice for a growth stock, but I believe Bloomsbury Publishing (LSE: BMY) has appeal. Not only does this group have a fast-growing digital division, but it’s also the publisher of Harry Potter books. With two new books due this year, sales should be buoyant.
However, my attraction to Bloomsbury stock isn’t just based on the company’s most famous character. I believe this is a high-quality business that’s performed well over a number of years, and now looks quite affordable.
Starting with the basics, analysts expect earnings per share to rise by about 13% in 2017/18, and by a further 6% in 2018/19. This puts the group’s shares on a forecast P/E of 14.2, falling to a P/E of 13.3 in 2018/19.
Growing momentum
However, what’s interesting about this is that broker forecasts for the year ahead rose significantly after the firm’s last set of results were published, in May. The firm’s next set of figures are due in October. If the company continues to impress City analysts, earnings estimates could be upgraded again.
Supporting Bloomsbury’s growth potential is a solid balance sheet, with £15.5m of net cash and no debt. So I’ve no concerns there.
I suspect many investors are overlooking Bloomsbury in favour of more exciting businesses. But in my view, this could be a surprisingly successful small-cap buy.