2 small-cap stars with exciting momentum

Shares of XLMedia(LSE: XLM) are trading 10% higher at 142p after it released its half-year results today.

Recent acquisitions

The digital publisher and marketing company reported impressive acquisitive growth as recent acquisitions helped the firm to expand its market reach and diversify away from gambling. This, combined with strong organic growth, helped to drive overall revenues in the six months to 30 June 33% higher to $67.9m.

It's also good to see margins holding up well, after declining only slightly from 52.7% last year, to 51.8%. As a result, underlying earnings rose by 30% to $22.9m, while pre-tax profits were up 23% to $22.9m.

Oversized exposure

Of course, XLMedia is still vulnerable to its oversized exposure to the gaming sector, which still accounts for some 63% of its revenues. The firm faces a number of potential headwinds there as regulatory risks and competitive pressures mount for the affiliate marketing business model. But on the upside, there's no sign yet of a severe slowdown on the horizon, and the company expects the proportion of revenues from gaming to further decrease following recent acquisitions of finance and cyber security websites.

Looking ahead, CEO Ory Weihs said: "Current trading remains strong and we are confident that the ongoing implementation of our strategic focus will continue to yield excellent results, underpinning the board's ongoing confidence in the Company's near and medium-term prospects."

And despite the rally in its shares today, valuations remain enticing as XLMedia trades at 12.3 times its expected earnings this year. Its income prospects are tempting too, with shares forecast to yield 4.2%, after a 5% increase in its interim dividend to 4.0226 cents per share.

Flying high

Elsewhere, specialist technology outsourcer Equiniti(LSE: EQN) has also been flying high lately, with shares in the company up 52% year-to-date.

Equiniti, which is best known for its share registration business, also provides investment, pension and compliance services to businesses and operates the Selftrade share dealing service. As the company provides the critical infrastructure which underpins big corporations, the business model is intrinsically more defensive than some of its peers in the outsourcing sector.

Defensive growth

The company, which works with 70 FTSE 100 companies, boasts a strong client list. And along with its strong client retention and a focus on long-term contracts, it has impressive visibility over future revenues.

Additionally, its free cash flow conversion is striking, at 109% in the first half of 2017, and the company is reinvesting its cash to develop and acquire new capabilities to maintain and extend its leading market position. Looking forward, Equiniti sees strong defensive growth opportunities from expanding its scope of services and favourable regulatory drivers, such as tighter anti-money laundering rules and stricter financial regulation.

On a forward P/E ratio of just 18.9 for the 2017/18 financial year, shares in Equiniti still look good value for those looking for a defensive growth play. It also benefits from a strong balance sheet and offers a 1.9% dividend yield.

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Jack Tang has no position in any 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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