In my experience, many people are quite conservative when it comes to stock market investing. Often, they’ll just buy a number of FTSE 100 stocks, or invest in a FTSE 100 tracker, with the goal of generating a return of 6%–8% per year.
There’s absolutely nothing wrong with this approach, of course. However, by allocating a little bit of capital to fast-growing smaller companies, investors could potentially boost their overall portfolio returns.
With that in mind, today I want to highlight two exciting small-cap stocks that have outperformed the FTSE 100 by a wide margin in recent years.
Alpha FX (LSE: AFX) is one of my favourite smaller companies. While the FTSE 100 has gone backwards over the last two years, AFX has more than doubled investors’ money!
An under-the-radar financial services company, Alpha specialises in providing foreign exchange (FX) hedging services to small- and medium-sized businesses. Combining high-level currency expertise with pioneering technology, the group helps companies manage their FX exposure more efficiently. Clients include high-profile names such as ASOS, Halfords, and Holland & Barrett.
The reason AFX shares have performed so well recently is that the company is growing at a prolific rate. For example, in its most recent half-year results, issued in early September, the group reported revenue growth of 60% and earnings per share growth of 49% (good luck trying to find that kind of growth in the FTSE 100!).
More recently, in an update last week the company advised that trading has continued to be strong and that it expects earnings for the year to be ahead of the market’s expectations.
Are AFX shares priced to buy today? Personally, I’d wait for a pullback before buying. Given that the share price is up nearly 40% in two months, I think there may be better buying opportunities ahead if you’re patient.
Impax Asset Management
Another small-cap stock that has outperformed the FTSE 100 by a significant margin is Impax Asset Management (LSE: IPX). It’s an asset management firm that specialises in sustainable investments – a huge growth area. Over the last two years, its share price has risen around 76%.
Like Alpha FX, Impax has grown at a rapid rate in recent years. For example, between its fiscal year (FY) 2015 and FY2018, the group’s net profit climbed from £3.6m to £11.4m, which represents a compound annual growth rate of 47%. And earlier this month, the company reported that its assets under management had grown 20% over the 12-month period to the end of September.
Looking at the investment case, I see considerable appeal in Impax. Profitability, as measured by operating margin and return on equity is high, while cash flow is healthy. The company also has a great dividend growth track record, having registered 10 consecutive dividend increases now.
Additionally, the valuation seems very reasonable – with analysts forecasting earnings per share of 12.8p for the year ending 30 September 2020, the forward price-to-earnings ratio is 20.2.
All things considered, I see Impax as a ‘buy’. I think the stock has the potential to keep smashing the FTSE 100 in the years ahead.
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Edward Sheldon owns shares in Alpha FX and ASOS. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Alpha FX. 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