2 under-the-radar growth stocks with huge upside potential
Ensuring concrete floors are laid laser-level is not the most exciting business in the world, but shareholders of Somero Enterprises (LSE: SOM) certainly don't care because they've seen the value of their shares grow over 1,300% in the past five years alone. And with a major competitive advantage over rivals, a huge potential market size and very capable long-standing management team the future is bright for this fast growing small cap.
The key to the company's success lies in its revolutionary Laser Screed machine it patented in 1986 that ensures concrete floors are laid incredibly level. This may seem mundane but it is critical for the warehouses of end users such as Amazon, Wal-Mart and Tesco as it increases efficiency, lowers maintenance costs and lessens the risk of catastrophic failure such as huge shelving units falling over.
Having pioneered this technology, Somero has built upon its first-mover advantage by continually inventing and patenting better machines and promising customers 24/7 global support from engineers in any major language as well as on-site training and next day in-person support across the globe. This has made the company the Rolls Royce of concrete levelling and built it a huge moat to entry against competitors that has stood for over 30 years.
The growth prospects for the business are also quite impressive. In 2016 $56.6m of the company's $79.4m in sales came from its home territory of North America and even in this relatively more saturated market the company increased sales by 15% year-on-year. With sales in other huge markets such as Europe and China accounting for only $8m and $6.4m in sales in 2016 it is clear there is space to grow many times over as the company brings on new sales staff to target these regions.
While investing in AIM-listed small caps can be worrying for some investors, Somero's corporate governance mechanisms and its CEO, who has been at the helm for 20 years of rapid but sustainable growth, reassure me greatly. There's also the company's healthy balance sheet with $20m in net cash, EBITDA margins that rose to 31% in 2016 and continued focus on prioritising customers rather than short-term investors. Add in a sane valuation of 14 times forward earnings and a respectable 2.77% dividend yield and Somero is a company I believe has great prospects.
Translating growth into high shareholder returns
A slightly larger, but still relatively unknown, company with similar prospects is patent translator RWS (LSE: RWS). The company works with some of the biggest pharmaceutical makers, law firms, manufacturers and banks to file patents in multiple jurisdictions and accurately translate critical commercial documents and regulatory submissions.
This business has been growing at a steady clip in recent years as companies scramble to protect their intellectual property in many markets at once. On top of steady organic growth the company has bolstered its position through major acquisitions, with two purchases of over $70m in the past year alone. This helped boost sales in the half to March by 33.6% year-on-year to a record £76m and pre-tax profits by a similar amount to £19m.
While the company's shares are pricey at 26 times forward earnings I'll be following the company closely thanks to great growth prospects and a balance sheet that provides firepower for further acquisitions.
If RWS's lofty valuation is a bit too lofty for your taste, I recommend reading the Motley Fool's free report on one Top Small Cap that is trading at just 8 times earnings. This low valuation comes despite a stellar record of four straight years of double-digits earnings growth.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.