When it comes to small-caps with big potential, in my opinion you can’t go wrong with Treatt (LSE: TET) and LSL Property Services (LSE: LSL). These two businesses couldn’t be more different, but they both have one thing in common, they’ve achieved impressive returns for investors over the years.
Today, I’m going to outline why I believe these two stocks deserve a place in your portfolio.
Explosive growth
When it comes to earnings growth, Treatt is in a world of its own. Over the past five years, the ingredients manufacturer to the flavour, fragrance and consumer goods markets has reported earnings per share (EPS) growth of 21% per annum. Net profit has grown from £3.1m to £9.6m for 2017.
And today the company announced yet another positive performance for the year ended 30 September. Adjusted operating profit for the period grew 8.1% year-on-year to £12.6m, and adjusted EPS jumped 9.8%, or by 14.1% on a constant currency basis.
What’s more, according to management, the company has already made a strong start to the new financial year. CEO Daemmon Reeve said the firm has “had a steady start to the new financial year” and sees a “number of attractive opportunities in our pipeline of projects with both existing and new customers.” Treatt’s CEO goes on to confirm that the business is trading in line with current market expectations for the full year.
While the company’s current financial year has only just started, considering its track record of growth I’m confident that the business can hit analyst targets for the next fiscal year. Current figures suggest the group will report EPS growth of around 4% for next year. Even though the stock might look expensive, trading at a forward P/E of 24.6, I reckon this is a price worth paying for such an impressive track record of earnings growth.
Income champion
LSL’s growth track record isn’t as impressive as Treatt’s, but when it comes to income, this property services business is by far the better buy. Right now, the stock supports a dividend yield of 4.2%, and the payout is covered 2.5 times by EPS.
There’s been some concern recently that LSL will have to reduce its distribution due to the cooling housing market. But a trading update issued by the company today seems to alleviate these concerns.
Unlike other property-focused businesses, which are struggling with declining numbers of transactions and falling home prices, LSL’s diversified business model helped the company grow revenues for the 10 months ended 31 October by 3.7%. Unfortunately, net debt has increased marginally over the year as the group has splashed out on acquisitions to expand its presence in the market for property financial services. However, I think the diversification seems sensible, considering the uncertain outlook for housing in the UK over the next few years.
As well as the market-beating dividend yield, shares in LSL also look relatively cheap, changing hands for just 9.4 times forward earnings. In my mind, when coupled with the attractive income distribution, I think this is a price worth paying for a well-diversified property business.
