My Foolish colleague Kevin Godbold has recently discussed a small-cap, whose earnings have soared more than 2,000% over the last five years, and which is now looking to crack the US market. Meanwhile, fellow Fool writer Paul Summers has his eye on both a medical technology firm and a data solutions provider that are flying under the radar of most investors.

My top secret growth stock

One of my current favourite growth stocks — FTSE SmallCap-listed Tarsus (LSE: TRS) — not only flies under the radar of most investors, but also is likely overlooked by many dedicated growth hunters.

For one thing, it’ll never appear on a stock screen with parameters set for both historical and forecast year-on-year earnings growth. And for another, if you stumbled across it among those five-year company earnings records you find on investment websites, you’d probably instantly dismiss it, due to the seemingly crazy annual swings in its earnings.

However, there’s a very good reason for the annual earnings volatility. And if you look behind, you’ll see what I believe is a very attractive growth stock.

Biennial cycle

Tarsus, which released its latest annual results today, is an international business-to-business media group. Its core revenue comes from a portfolio of exhibitions that bring buyers and sellers together. Ancillary sources of revenue include conferences, educational programmes and online products related to the exhibitions.

Now the thing is that many of the biggest of these exhibitions, such as the Dubai Airshow and Labelexpo Europe, are biennial. The cycle happens to be such that Tarsus has more business in odd-number years than in even-number years. You can see this clearly in the progression of earnings per share (EPS) in the table below.

While annual EPS has been up and down like a dog at a fair, biennial growth has been consistently positive. It’s also been strong, the average working out at over 15%. In other words, hidden behind the annual earnings volatility is a nice underlying growth business.

Quickening the pace

In 2013, Tarsus launched the first phase of its Quickening the Pace strategy, under which it targeted expansion in high-growth geographies and high-growth industries. It reckons “total shareholder return over the period [2013-17] was 111%, approximately 50% better than our peer group.”

Today’s results for 2018 represent a strong first year in the second phase of the strategy, under which “the group will deepen its presence in higher growth markets; look to maximise the scale of existing events; and acquire new platforms for growth.”

Attractive valuation

The shares are trading at 298p (11% up on the day), as I’m writing. Averaging the last two years’ EPS gives 22.6p, and a price-to-earnings (P/E) ratio of 13.2. Meanwhile, an 11p dividend (a 10% increase on last year) represents a running yield of 3.7%.

Tarsus may not have the exponential growth and rapid millionaire-maker potential of riskier, more ‘blue-sky’ small-caps, but I believe the current valuation is attractive and that it could be a very rewarding growth stock to buy today and hold for the long term.

The post Could my top secret growth stock be a millionaire maker? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tarsus 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.

Strong underlying growth

Tarsus is growing strongly, both organically and through carefully targeted acquisitions, intent on maximising the scale of its exhibitions and conferences and deepening its presence in higher-growth markets. A record year in 2017 saw revenue of £118m — 72% ahead of 2016 — and an 82% rise in underlying earnings per share (EPS) to 27.7p.

The current share price is 306p (little changed on the day), valuing this FTSE SmallCap-listed company at £346m. The price-to-sales (P/S) ratio is 2.9, the price-to-earnings (P/E) ratio is 11 and there’s also a 3.3% dividend yield, with the board having declared a 10p a share payout.

Tarsus has an up-and-down annual EPS profile, which is off-putting at first sight. However, this cycle is because not all its events are annual. The table below, showing EPS growth year-on-year and year-on-year-after, gives an understanding of the progress the company’s making.

I’m not concerned by Tarsus’s lumpy year-on-year earnings. The bottom line of the table shows the strong underlying growth and I rate the stock a ‘buy’.

Price to sales

I had a close look at Versarien just before Christmas. I found no glaring ‘red flags’ in this AIM-listed company’s accounts or in its directors’ backgrounds. Its history of acquisitions wasn’t altogether impressive but I concluded that two key acquisitions in the graphene space represented a genuinely significant commercial opportunity.

My personal rule of thumb is that however promising a company may be, the maximum P/S I’d be willing to buy at is 10. In Versarien’s case this resulted in a buy price of up to 59p, based on annualising its £4.38m revenue in the six months to 30 September.

Progress

Having missed a chance when the shares dipped into my ‘buy’ territory early in the New Year and with a good bit of news flow from the company since, how does the land lie today?

So far this year, Versarien has announced an agreement with an unnamed Asia-headquartered global textiles and apparel manufacturer, a medical technology collaboration and another with minimalist footwear maker Vivobarefoot. As with similar announcements in the latter part of last year, it has given no indication of future revenues. Nor have we had an update on actual revenue booked since the 30 September half-year-end.

Price target

I can still find no broker forecasts, which leaves me with my valuation based on annualised H1 revenue. However, with the news flow and the year-end approaching, I’m now inclined to calculate revenue more generously by applying the H1 growth rate to the full year. This results in a figure of £9.95m.

So on my maximum P/S of 10, I’d only rate Versarien a ‘buy’ with its market capitalisation at up to £99.5m — currently represented by a share price of 67p. With the shares trading at 85p as I’m writing, I may live to rue missing that sub-59p opportunity at the start of the year.

The post Versarien plc isn’t the only growth stock that could make you a million 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?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tarsus 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.

Mixed outlook

While integrated media company Tarsus (LSE: TRS) is forecast to record a rise in its bottom line of 78% in the current financial year, its performance in 2018 is set to be relatively disappointing. The company’s earnings are due to fall by 31% next year, which mirrors the performance of the business over the previous five years. In that time, its bottom line has flipped between double-digit earnings growth and double-digit declines in its bottom line.

Given the volatile nature of the company’s financial performance, its share price may come under pressure over the medium term. The outlook for the global economy is relatively uncertain and this could prompt investors to adopt an increasingly risk-off attitude towards the types of stocks they hold. As such, demand for Tarsus’s shares could fall and this could cause a decline in its share price.

Taking into account the company’s forecasts for the next two years, it trades on a forward price-to-earnings (P/E) ratio of 15.1. This suggests that it lacks a sufficient margin of safety to merit investment at the present time. Certainly, from an income perspective it may continue to have some appeal. Its dividend yield of 3.4% is covered 2.9 times by profit. However, in terms of capital gain potential, there seem to be better opportunities available elsewhere.

Stable performance

While Tarsus has recorded volatile earnings growth in recent years, filtration and environmental technology company Porvair (LSE: PRV) has been a consistent performer. It has delivered a rise in earnings in each of the last five years, with its bottom line rising at an annualised rate of 18.5% during the period. This robust performance could become more appealing to investors at a time when potential risks such as Brexit and Trump’s presidency are coming to the fore.

Looking ahead, Porvair is forecast to record a rise in its bottom line of 5% in the current year and 4% next year. While positive, they are behind the growth rates over the last five years. This could cause a problem for Porvair’s share price in future, since the company continues to trade on a relatively high P/E ratio. For example, its rating is currently 28.5, which indicates a much higher earnings growth rate may be required in order to justify its present share price.

Certainly, as a business Porvair seems to be performing well. Its acquisition of JG Finneran could prove to be a sound move, as the two businesses should be a good fit. However, in the near term its share price performance may disappoint due to what appears to be a failure by the market to successfully adapt its valuation to what may be a lower-growth period for the business.

The post 2 small-cap stocks you may wish to ignore appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Porvair. The Motley Fool UK has recommended Tarsus 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.