However, personally, I’ve never been tempted to touch the shares and I’ve warned investors about the dangers of investing in companies such as Sirius in the past.

To my mind, SXX is a classic ‘jam tomorrow’ type of stock. Yes, there’s an interesting growth story. But at the same time, profits could be a long way off. This adds a lot of risk for investors.

The last time I covered the shares in mid-March, they were trading at 20p. Now, they’re at 16p after recent news the shares will be diluted heavily. This fall doesn’t surprise me at all.

Overall, I see Sirius shares as quite risky and I’ll be continuing to avoid the stock for now. I think there are much better small-cap growth stocks out there.

Focus on profits

One thing I’ve learned over the years is that focusing on smaller companies that are already generating profits can be a much safer investment strategy, as it tends to reduce your chances of getting burnt. And one example of this kind of smaller company is foreign exchange specialist Alpha FX (LSE: AFX). Its shares are up 42% this year, versus a fall of 25% for SXX.

An under-the-radar stock, Alpha specialises in FX hedging services for small- and medium-sized corporate clients. Its customers include the likes of ASOS and Halfords. The group has enjoyed rapid growth over the last few years, with net profit rising around 900% between 2014 and 2018. Profitability is extremely high with return on equity (ROE) averaging 60% over that period.

Strong growth

Recent full-year results from Alpha were very impressive, with revenue increasing 73% for the year and underlying basic earnings per share (EPS) surging 30%. The company also reported a 55% increase in clients and hiked its final dividend 35%.

But what I think is most interesting here is the fact the company said it’s “barely scratching the surface of the group’s potential,” which suggests there could be plenty more growth to come here.

Valuation

Alpha FX shares have had an excellent run over the last 12 months, rising around 60%. After that kind of gain, the shares no longer offer as much value as they did. However, I wouldn’t necessarily let that put you off the investment case.

At present, there’s only one broker covering the stock and it has an EPS forecast of 24.3p for FY2019. Yet that forecast looks a little low to me. Last year, EPS came in at 22.7p per share, and for the last two years earnings have grown at around 30% per year.

So, even if we take a conservative growth projection and assume that EPS rise 20% this year, we could be looking at EPS of 27.2p for FY2019, which gives a forward-looking P/E ratio of around 29.5 at the current price. I think that’s still a reasonable valuation for this kind of fast-growing company. As such, I continue to rate Alpha FX shares as a ‘buy’.

The post Sirius Minerals shares? I’d rather buy this brilliant growth stock appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
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Edward Sheldon owns shares in Alpha FX. The Motley Fool UK owns shares of and has recommended ASOS. 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.

As the firm’s contracts with customers usually span several years, management can set dividend policy safe in the knowledge they know roughly how much money the company will be making in the near term — that’s the theory anyway.

Cracks starting to show

However, as I highlighted in my last article on the company, National Grid’s deteriorating balance sheet could become problematic.

Net debt has increased from £23bn to £26bn between 2013 and 2018 as the group’s net profit has stagnated. Meanwhile, management has been steadily growing National Grid’s annual dividend payout. Deteriorating earnings and a rising payout means dividend cover has fallen from 1.5 to 1.2 since 2013.

As I’ve said before, it’s difficult to tell if, or when, this trend will become a problem for National Grid’s dividend, but it’s something I don’t want to be exposed to. At the same time, there are some signs regulators are looking to clamp down, which only adds further uncertainty to the mix.

After considering all of the above, even though National Grid’s 5.5% dividend yield might look attractive, I don’t think it’s worth taking the risk. If the company suddenly decides to cut its dividend, the shares could lurch lower, inflicting severe losses on income investors.

So, I’m a seller of the National Grid share price. One company I think could replace this utility giant in your portfolio is Alpha FX (LSE: AFX).

Small-cap champion

Selling one of the UK’s largest utility businesses to buy a small-cap growth stock might not seem a sensible idea at first, but I firmly believe Alpha will outperform National Grid in the years ahead.

Alpha is a foreign currency broker, which helps its clients manage the impact of currency volatility. This might not seem like a particularly defensive business, but it’s a booming market. Globalisation has helped foreign exchange trading become one of the largest financial markets in the world with more than $5trn trading activity going on daily.

At present, Alpha makes up a tiny sliver of this market. Over the past five years, the company has proven itself growing revenues from just £3m to £23.5m. What’s more, unlike so many other small-cap growth stocks, the company has been profitable virtually from the very beginning.

It reported a net profit of £740k in 2014, the first year for which we have accounts and net profit hit £7.8m last year. Alpha’s management believes it’s “barely scratching the surface” of the group’s potential, and I completely agree.

What I’m particularly excited about here is the dividend potential. At the time of its IPO in 2017, Alpha told shareholders it would pay out 30% of underlying profits after tax each financial year. Following a record performance in 2018, today management has declared a total dividend of 6.5p for 2018, up 33% year-on-year.

This gives a dividend yield of only 1.1% at present, but considering Alpha’s historical growth and £35m net cash balance, what the payout lacks in size it more than makes up for in quality.

The post A FTSE 100 dividend stock yielding 5.5% I’d sell to buy this growing small-cap appeared first on The Twelfth Magpie.

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• 3 British dividend stocks to consider for passive income this summer
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• 2 juicy income shares with big exposure to AI
• Are National Grid shares entering a new valuation era in the FTSE 100?

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.

With that in mind, here’s a look at two FTSE 100-beating high-growth smaller companies that I believe offer compelling investment potential.

dotDigital

dotDigital (LSE: DOTD) is a technology company that specialises in email marketing. Its key product dotDigital Engagement Cloud (previously known as Dotmailer) is an advanced email marketing platform that enables companies to create, test, and send data-driven automated email campaigns, and provides access to rich insights in real time. Designed to ‘empower’ marketers, Engagement Cloud is already used by over 4,000 brands worldwide, including names such as Barbour, Virgin Active, and T.M. Lewin.

Dotdigital has grown significantly in recent years and half-year results released this morning show that the group is still growing at an impressive rate. For example, for the six months to 31 December, group revenue grew 33% (organic revenue was up 15%) and group adjusted EBITDA surged 25%. Furthermore, the group’s cash balance at the end of the period climbed nearly 60% and a dividend hike of a healthy 16% was declared.

After a strong run between 2015 and 2018 where the share price surged around 230% (smashing the FTSE 100), the stock has consolidated its gains over the last 12 months. As such, I believe now could be a good time to get in, before it has another upward run. It’s up 5% today so could this be the beginning of the next leg up? The stock’s forward-looking P/E ratio of 24.2 seems fair to my mind, given the company’s growth.

Alpha FX

Another small-cap that I like right now is Alpha FX (LSE: AFX), a little-known company that specialises in FX hedging services for small and medium-sized corporate clients. Its customers currently include well-known names such as ASOS, Halfords, and Jamie Oliver yet according to Alpha, it has only penetrated a tiny proportion of its addressable market, meaning that there could be plenty of growth to come.

Like DOTD, this is a company that is growing quickly. For example, in its interim report in September, the group reported revenue growth of an impressive 55%, as well as underlying operating profit growth of 29%. Furthermore, in an update on 3 January, the group advised that recent trading has been strong and that it expects earnings for the full year to be above market expectations. What’s also impressive about AFX is that operating margins and return on equity are high, which indicate it’s a highly profitable company.

Analysts currently expect the group to generate earnings of 25.2p per share this year, which puts the stock on a forward P/E of 26.2. I think that’s a reasonable price to pay for this high-growth niche company. If the business can keep on-boarding new customers, I believe there is potential for significant upside here.

The post Two FTSE 100-beating growth stocks that I believe could double your money appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in dotDigital Group and Alpha FX. The Motley Fool UK has recommended dotDigital Group. 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.

While I think this is a sensible strategy, I’m also not against adding a little small-cap exposure to an ISA in an attempt to boost capital gains. Obviously, smaller companies are riskier than large companies, so you don’t want to be overexposed. However, a small allocation to high-growth companies could be rewarding over the long term and potentially get you to ISA millionaire status faster.

With that in mind, here are two exciting high-growth small-caps to consider.

Alpha FX

£160m market cap Alpha FX (LSE: AFX) is a UK-based foreign exchange service provider that focuses on managing exchange-rate risk for UK companies that trade internationally. The firm is relatively new to the stock market, only floating on the AIM market in April last year. But don’t let that put you off. The company has enjoyed strong revenue and profit growth in recent years, and this morning’s FY2017 full-year results demonstrate significant further progress.

For the year ending 31 December, Alpha recorded revenue growth of 60% to £13.5m, with underlying operating profit surging 55% to £6.8m. Underlying basic earnings per share climbed 31% to 17.5p (vs the consensus estimate of 16.1p) and the board recommended a final dividend of 3.4p per share, taking the full-year payout to 4.9p. The group finished the year with a cash pile of £13.1m, up from £7.6m last year.

The growth story looks exciting here, in my opinion. Alpha increased its client numbers by 39% in 2017, yet stated today that it has only penetrated a “small proportion” of its addressable market. Going forward, the group plans to continue attracting corporate clients in the UK as well as expanding to the institutional and overseas markets, which leads me to believe there is significant growth potential ahead.

Alpha shares currently trade on a forward P/E of 26 times estimated FY2018 earnings, a valuation that looks reasonable to me, given the company’s momentum. The stock is up 6% today, but I think there could be plenty more gains to come from this exciting small-cap company.

K3 Capital

Another small-cap that is growing at an incredible rate, and a stock that I own myself, is K3 Capital (LSE: K3C). The £130m market cap company is a business sales and brokerage one with operations throughout the UK. K3C shares have doubled in price over the last six months, but I believe they can keep moving higher in the medium-to-long term.

A trading update at the beginning of March was bullish, with management stating that group performance had been strong since interim results were released in mid-January. The company advised that it is trading “substantially ahead” of management’s expectations for the year ending 31 May 2018 and that it expects full-year revenue to climb around 50%.

Unfortunately, after a 40% share price rise over the last month, K3C shares no longer offer the value they did earlier in the year. The forward P/E is now around 31, which reduces the margin for error. I say stick this one on your watchlist and keep a close eye on it. It could be a good stock to buy on a pullback.

The post Could these high-growth small-caps help you achieve your ISA millionaire goal? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in K3 Capital. 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.

But maybe it’s different this time. Indeed, on the face of it, there’s plenty to like about Sound Energy: a respected management team with lots of industry experience, a nice thesis about Moroccan gas and European demand, and a solid base of partners including Schlumberger and government-backed Moroccan investment funds.

However, you’ll not find me buying shares of the company for a few very simple reasons. For one, it is still very much in the middle of what will likely be a long and twisting path to discover just how much natural gas lies in the fields it has a stake in.

As current investors know well, this will mean an incredibly volatile share price as good or bad news is released to the public. Furthermore, without knowing exactly how much gas it has an interest in, it’s incredibly difficult to accurately value the business and determine whether or not its current share price is attractive.

Second, while it’s great news that Moroccan investors may pay for the export pipeline and potentially some upstream processing facilities, shareholders will almost certainly still be tapped repeatedly for cash in the many years before production begins. Today’s news that a CFO has been appointed certainly makes a new rights issue likely in my mind, which will, of course, dilute existing shareholders unless they pony up more money.

In the end, Sound Energy could be a once-in-a-lifetime investment opportunity, but as hardened AIM investors will know there’s been plenty of companies before it that have spun a similar tale and gone nowhere.

A safer bet? 

If I were to make a semi-speculative investment on a small AIM-listed company, I’d be much more inclined to consider £150m market cap Alpha FX (LSE: AFX). As its name suggests, the company provides FX consulting and trading services with a focus on UK-based SMEs.

This is an industry that has plenty of competition but I see room for Alpha FX to continue to take market share from smaller competitors as well as the big banks that dominate with around 85% market share. This is because, rather than focusing solely on ginning up commission from sales, the company revolves around dedicated client support managers who offer free consulting services to their clients. This increases client loyalty and also serves to differentiate the company from rivals.

Thus far the strategy is paying off as well as revenue in the half to June jumped from £3.3m to £6.3m year-on-year, as it retained 97% of clients and brought on board new and larger ones. Plus, with operating profits of £2.4m recorded during the period and £14m in net cash on the balance sheet, the company won’t need to tap shareholders to fund expansion anytime soon following its recent IPO. At 36 times forward earnings there’s significant growth already priced-into its share price but I see plenty of reasons to take a closer look at Alpha FX.

The post One growth stock I’d buy ahead of Sound Energy plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Ian Pierce has no position in any of the 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.