One three-bagger and one turnaround stock I'd buy in 2018

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Fantasy figure retailer Games Workshop Group(LSE: GAW) has been one of the most exciting UK small-caps lately, its share price up 263% in the past 12 months. Over three years, it has grown a whopping 438%. However, it is down around 2% today, following the publication of its half-yearly results for the six months to 26 November.

GAW, shucks

CEO Kevin Rountree was proud of today's "cracking" results and reported "record sales and profit levels in the period" across all regions and channels. "Given the high levels of operational gearing and our relentless management of our costs, our improving sales performance has translated into record profit and cash levels," he added.

Year-on-year revenues jumped 54% from £70.9m to £108.9m, operating profit and pre-tax profit leapt 181% from £13.8m to £38.8m. Cash generated from operations doubled from £19.6m to £41.2m, while basic earnings per share (EPS) almost tripled from 34p to 97.6p.

Game on

Shareholders reaped the reward, with a dividend per share declared in the period of 61p, up from 25p last year. Rowntree also highlighted improved return on capital, which rose from 40% to 119% at November 2017.

Given its strong performance, it is encouraging to see this £823m company trading on a reasonable forecast valuation of just 18.7 times earnings. The forecast dividend is 4.7%, although forecast EPS growth is 117% in 2017, with a further 77% expected in 2018. There may be volatility ahead, with a predicted 15% EPS dip in 2019, and of course no company can maintain this blistering growth forever. However, Games Workshop should still generate lots of fun.

Playing up

Online gaming and financial trading technology provider Playtech (LSE: PTEC) is another solid techie growth stock, or at least it was. Although it would have doubled your money over the last five years, you would have suffered a nasty shock in November, when the share price plunged after the company warned about missing performance targets.

There are also concerns about client Ladbrokes Coral as its agreed merger talks with GVC Holdings could have implications for Playtech's contract to provide gambling software for Ladbrokes. The stock is down around 7% in the last three months. There has also been the underlying concern that founder Teddy Sagi is looking to sell up and leave the business, after dumping a hefty stake in the company last June.

Lower expectations

All of this has knocked Playtech's valuation to near bargain levels of a forecast 12.6 times earnings. Despite this, analysts remain optimistic, forecasting 12% EPS growth in 2017, and a further 9% in 2018. However, I note that these have been revised downwards, from 27% and 13% respectively when Jack Tang called Playtech a growth bargain in October

Price-to-earnings growth (PEG) projections of 1.2 in 2017 and 1.4 in 2018 are also heading in the wrong direction. Back in October they stood at just 0.5 and 0.9. So Playtech is now looking more expensive when measured in terms of earnings growth. You may prefer these tech heroes instead.

Playtech offsets these concerns by offering an attractive forecast dividend yield of 3.9%, covered twice. Revenues and profits are also heading in the right direction. 

However, I wouldn't buy either of them without first checking out this exciting growth prospect. 

This mid-cap company has been turning on the style lately and one of the Motley Fool's top analysts reckons it is the latest British brand with the potential to go global.

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Harvey Jones has no position in any of the shares 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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