After its phenomenal price rise in 2017, Bitcoin has captured the minds of many investors. There are plenty of people who believe the cryptocurrency is a ticket to riches.
Personally, I’m not sold on the Bitcoin story. Given that it’s only been around for about a decade, it’s unproven as a long-term wealth generator. And with regulators across the world cracking down on digital currencies, there’s a great deal of uncertainty in relation to its future. It’s also impossible to value, and notoriously volatile, which means it’s a risky investment.
If you’re looking for big capital gains, a more sensible investment strategy, in my view, is investing in smaller companies that are growing rapidly. As they grow in size, their share prices tend to rise as well. As such, with a little patience, you could potentially turn £1k into £2k, £5k, or even £10k, if you pick the right stocks.
With that in mind, here’s a look at two smaller growth companies I believe have considerable investment potential right now.
First Derivatives (LSE: FDP) is a technology company that operates in the big data space. Its key product, Kx, is a high-performance database solution used by a range of companies including Google, Deutsche Bank, and Aston Martin Red Bull Racing.
FDP has grown at an impressive rate in recent years (three-year sales growth of 85%) and the group’s most recent half-year results, issued yesterday, showed further progress. For the six months ended 31 August, both revenue and reported diluted earnings per share increased 11%, while recurring revenue in the Kx business increased 18%.
The company also advised that is has a “strong pipeline and momentum” going into the second half of the year, which suggests there should be more growth to come.
FDP shares currently trade on a forward-looking P/E ratio of 26.4, which I think is a very reasonable valuation for a company operating in the high-growth data industry. At the current share price and market capitalisation (£584m), I see the potential for considerable share price gains in the years ahead.
Another small-cap stock I believe has substantial potential is Keystone Law (LSE: KEYS). This is an innovative law firm disrupting the market by enabling lawyers to work from home or their own offices. Currently, the group has around 300 lawyers on its books, yet it believes its addressable market is a huge 47,000 lawyers, which suggests there’s plenty of room for growth.
Like First Derivatives, this is a small company (£158m market-cap) that’s growing quickly. Over the last three full financial years, sales have grown by over 100%, while net profit has surged nearly seven-fold. And, if the recent 28% hike in the half-year dividend is anything to go by, management is pretty confident in relation to the group’s future growth prospects.
At first glance, Keystone Law looks a little expensive as the forward-looking P/E ratio is 34.6. However, I don’t see that valuation as a deal-breaker. Given the group’s growth prospects, I think it’s worth a premium valuation.
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Edward Sheldon owns shares in First Derivatives, Keystone Law, and Alphabet. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares). 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.
Motley Fool UK 2019