2 small-cap stocks I'd buy in March

Updated: 
Games Workshop

Shares in pottery manufacturer Portmeirion(LSE: PMP) dived earlier this year after it announced a slowdown in some of its major markets, including South Korea and India.

Despite this, the company has put in a decent trading performance, with revenue predicted to be over £76m for the full year. This is a record figure for the company and is around 11% ahead of the prior year.

Admittedly, this figure has been massaged by the acquisition of Wax Lyrical and favourable exchange rates. But this impressive performance in the face of difficult conditions shows just how robust the famous pottery company is.

I believe this is largely down to the company's quintessentially British brands. They ionclude Botanic Garden, which accounts for nearly half of sales, plus Spode Christmas Tree and Royal Worcester, two established brands that have gone from strength to strength since the company bought them out of administration.

The rich history behind these names has international appeal, selling strongly in North America as well as the aforementioned Asian markets.

The company has regularly achieved strong returns on capital, averaging 15.4% over the last five years due to the pricing power behind these prestigious brands and a laser focus on operational discipline.

The company currently trades on a P/E of 15 and yields 3.1%, which is more than justified by its growth record. The company has doubled its dividend since 2008 and more than doubled earnings in the same period.

A recovering core and strong royalties

I've been quite critical of table-top war-gaming specialist Games Workshop(LSE: GAW) recently, largely due to a massive restructuring of its flagship game Warhammer, which I believed could alienate legions of loyal fans.

It seems I was a little hasty in my condemnation given the impressive return to growth in the core business in recent months. The company's first-half operating profit pre-royalties jumped from £4.7m last year to £10.5m this year.

This is important, as core profits represent the success of the company's table-top games and related products. If these games fail, the intellectual property, including the fiction created over decades, will become less valuable. Royalties depend on the success of computer games launched by other companies and are therefore inherently lumpy.

The company has struggled to grow sales in recent years, but opening a net nine new stores and another 60 new trade accounts in the latest period helped expansion kick off once more, with revenue increasing 28%.

Games Workshop has a loyal core of customers and a debt-free balance sheet. If the company can replicate its first-half figures in the second half, which includes the key Christmas trading period, it would trade on a P/E of 13, which seems a good offer for a company whose new strategy seems to be rejuvenating its growth prospects.

Both of these small-cap shares fall into the growth at a reasonable price category, but we've found another minnow with more explosive growth potential. The company in question trades on a P/E of seven, could have double-digit earnings growth on the horizon and benefits from a profitable and recurring revenue stream.

Click here to download the investment thesis behind this small-cap opportunity free of obligation.

Zach Coffell has no position in any shares mentioned. The Motley Fool UK has recommended Portmeirion Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.