Small-cap investing can be very profitable if you can manage to identify successful fast-growing companies before they hit mainstream investor radars.
For example, a £5,000 investment just 10 years ago, split across three up-and-coming companies ASOS(LSE: ASC), First Derivatives(LSE: FDP) and Telit Communications(LSE: TCM), would now be worth an incredible £113,500.
10 years ago these companies' revenues were a fraction of what they are today and for those investors brave enough to invest at the time and hold on for the long haul, the results have been truly life changing. So what's next for these three? Will the 10 years ahead bring similar returns?
Asos is an incredible success story and it's not hard to see why the online retailer has performed so strongly over the last decade, with revenues growing from £20m in FY2006 to a huge £1,445m in FY2016, a stunning 10-year compounded annual growth rate (CAGR) of 54%.
While many city analysts believe that the share price can continue to climb from here, I have concerns that the stock is too expensive at current levels.
Revenue growth at the retailer is still strong, with average growth of 23% over the last three years, however Asos trades on an eye-watering P/E ratio of 79 and a price/earnings-to-growth (PEG) ratio of a high 3.3, suggesting to me that the stock is currently overvalued.
I'm a huge fan of Asos as an online retailer, but I don't believe the stock offers good value at the current share price.
Big data specialist First Derivatives is another that has performed exceptionally well for long-term shareholders with 10-year revenue CAGR of 34% propelling the share price from 160p in late 2006, to 2,100p today.
The tech firm recently reported excellent interim results with H1 revenue climbing 34%, adjusted diluted earnings per share increasing 21% and management stating that the company has a "strong pipeline of opportunities in multiple industry segments."
First Derivatives currently trades on a forward looking P/E ratio of 36 times next year's earnings, which isn't cheap. But I believe the company is well placed to capitalise on the fast growing demand for big data services and thus still has considerable potential going forward.
Rise of the machines
When Japan's SoftBank paid $32bn for ARM Holdings earlier this year, the internet giant made it clear that it was specifically looking to capture the "very significant opportunities provided by the Internet of Things."
And one company poised to benefit from the Internet of Things (IoT) revolution is Telit Communications.
Despite revenue growth at Telit picking up significantly over the last five years, the stock trades on a P/E ratio of just 12.2 times last year's earnings, which seems quite low in my opinion.
H1 2016 results were no doubt disappointing with earnings falling 15% on the back of unexpected delays in US certification requirements for its new LTE Cat-1 product line. However the certifications for these products are now in hand, and Telit is confident of a strong second half of 2016, recently advising the market that earnings for the year will be between 26 and 30 cents per share.
With a 30% share of the IoT market, Telit is at the forefront of an industry set to see tremendous growth in the next few years and as a result I believe there's plenty of growth to come from this tech minnow.
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Edward Sheldon owns shares in First Derivatives and Telit Communications. The Motley Fool UK owns shares of and has recommended ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.