Ignore the FTSE 100. I believe these growth stocks could be a much better buy
The FTSE 100 is the UK’s leading stock index, and for this reason, it has always attracted plenty of attention. However, more than two-thirds of the FTSE 100’s profits are generated outside of the UK, making it more of a barometer of global economic health than of UK progress.
What’s more, many of the companies in the FTSE 100 today are constricted by their size. It’s easier for a tiny business to double its size — and your money — than for a big one.
With that in mind, here are two small-cap growth stocks that I believe could be much better investments than the FTSE 100 today.
Earnings double
With a market cap of £261m, Zotefoams(LSE: ZTF) flies under the radar of most investors. The company, which produces cellular material used in a range of industries including packaging, transport, medical and construction, has seen net profit nearly double over the past three years as sales have jumped 43%.
Analysts had been expecting the company to report an increase in net profit of 38% for 2018, but it now looks as if the group is set to beat this projection. In a trading update published this morning, management said that “full-year revenues and profit before tax are now expected to be slightly ahead of consensus market expectations.” All of the business divisions reported growth in the first nine months of 2018 and it seems that the firm just can’t keep up with demand.
New production facilities are on track to open in the UK and US next year. In 2020, a new facility in Poland is set to open its doors too. Management’s expansion efforts indicate to me that Zotefoams is planning for a significant increase in demand for its products over the next few years, and now could be the time for investors to get on board
The stock is changing hands today at 30 times forward earnings, which is right at the top end of what I would consider acceptable for a growth stock. However, the recent update is enough to convince me that the shares are worth this high price. If profits go on to double again over the next three years, as they have in the last three, investors could be well rewarded.
Attractive margins
Another small-cap that’s recently caught my eye is Medica(LSE: MGP). What I like about this health-tech business is its robust profit margins. For the past five years, the operating profit margin has averaged 21%. And profits have exploded since 2015. Earnings per share (EPS) jumped 157% in 2016, 42% in 2017 and are set to grow 37% for 2018.
However, despite the explosive growth, it seems that the rest of the market has not woken up to the opportunity here. Shares in Medica are currently trading at a forward P/E of just 18.3, falling to 15.9 for 2019, which looks too cheap to me.
Alongside the company’s unaudited half-year results, management confirmed that Medica is on track to hit City growth forecasts for the year, and strong cash generation will mean that by year-end, net debt will be close to zero from £2.5m at the halfway point. I reckon moving to a net cash position will result in acquisitions that could help accelerate EPS growth in the years ahead. There’s also the possibility of higher cash returns for investors.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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