Revenue in the six months to 31 December grew by 25% to £18.8m, with adjusted EBITDA up 8% to £5.7m. The acquisition of Comapi in November caused a cash outflow of £10.7m, but that still left the company with cash of £10.5m at the halfway stage.

Software can be a fickle business. But dotDigital’s approach is to provide software as a service, expand its offering (the Comapi acquisition apparently “provides further progress towards fully-fledged omnichannel offering“), and build long-term customer relationships.

That should hopefully provide both stability and a grounding for long-term growth, as CEO Milan Pate said the firm has “further cemented our partnerships with Magento, Shopify, Microsoft and our other partners.“

Cash prospects

That strategy leads to recurring revenue streams and strong cash generation, and I think we could be looking at one of tomorrow’s big cash cows here. Dividends are currently only yielding under 1%, but that’s covered more than four times by earnings, and it’s progressive. From 0.1p per share in 2013, a dividend of 0.68p is forecast for the current year.

It does lead to my one caution that’s common with growth stocks. When a company starts to reach maturity and the transition from an all-out growth story to the beginnings of an income investment, the growth investors often dump it and the share price takes a knock.

But I like the long-term look of dotDigital, and I don’t see a 2019 P/E of 24 as too demanding.

Bigger risk

An example of a ‘jam tomorrow’ lossmaker that I’d steer clear of right now is Verona Pharma (LSE: VRP), but I want to start by telling you what I like about it.

Verona focuses on “developing and commercialising innovative therapies for respiratory diseases,” and 2017 results looked promising — for a start-up still in its cash-burn phase, at least.

Clinical studies sound impressive, with two having recently completed ahead of schedule. The firm’s RPL554 treatment for COPD, when used alongside Tiotropium, gave positive results including “significant and clinically meaningful additional improvement in peak lung function” and faster onset of action. It was well tolerated too, which is a key achievement.

Verona also raised £70m in the period, from a combination of a successful IPO on the Nasdaq Global Market, together with a European private placement and a shareholder private placement. That, especially the Nasdaq launch, suggests that some serious investors see great promise here.

Risky finances

I was bullish a year ago, but finances put me off now. A reported operating loss of £29.8m was due to the costs of these clinical trials and to pre-clinical activities, and the firm did end the year with £80.3m in cash and equivalents on the books.

But net cash used in operating activities ramped up to £20.7m (from £5.6m), and there are pre-tax losses of more than £30m per year currently forecast for the next two years.

That increases the likelihood of further cash being needed before profits come around, and with the pitfalls that can beset the pharma business right up until the last minute, the risk is too great for me.

The post A small-cap growth stock I’d buy with £1,000 today, and one I’d sell appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the shares mentioned. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. The Motley Fool UK owns shares of and has recommended Shopify. 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.

Shares in Verona Pharma (LSE: VRP) have soared by over 20% today after the company announced a successful placing to raise gross proceeds of £44.7m. The money raised will be used to fund a Phase 2b clinical trial in chronic obstructive pulmonary disease (COPD) for the company’s treatment called RPL554. Further Phase 2 studies for RPL554 in COPD and cystic fibrosis are also planned, with the money being earmarked for that use, too.

Clearly, the outlook for Verona Pharma is relatively upbeat and market sentiment is improving following a challenging year for the company’s investors. Even after today’s rise, shares in Verona Pharma are still down by 37% in the last year but with the company’s financial outlook being optimistic, that could be about to change.

Certainly, Verona Pharma is a smaller, high risk play which lacks the diversity of a major pharmaceutical peer. However, for less risk averse investors it could be worthy of a closer look – especially for the medium to long term.

A step-change in sentiment

Also increasing in value today are shares in STM (LSE: STM), with the financial services company recording a rise of 12%. That’s despite no significant news flow having been released by STM, with a rising wider market likely to be the major reason for improving investor sentiment in the stock.

Today’s rise is a step-change in investor sentiment for STM, with the company’s share price having fallen by 13% year-to-date even with today’s double-digit gains taken into account. And with STM forecast to increase its bottom line by 23% in the current year and by a further 33% next year, it would be somewhat unsurprising if the market continued to view STM more favourably.

This could lead to an upward rerating and with STM trading on a price-to-earnings growth (PEG) ratio of just 0.2, there is tremendous scope for this to take place over the medium to long term. Furthermore, due to STM’s yield of 3.1% and its forecast growth in dividends of 31% next year, it remains a sound income option for less risk averse investors.

Wide margin of safety

Meanwhile, shares in NAHL Group (LSE: NAH) are also among today’s biggest gainers. They are up by as much as 9% despite no significant news flow having been released by the company since its AGM statement in May. Encouragingly, NAHL reported back then that it was trading in-line with expectations, although its outlook remained uncertain given the prospect of regulatory change following the Chancellor’s Autumn Statement from 2015.

Looking ahead, NAHL is forecast to increase its bottom line by around a third next year. If met, this would put it on a forward price-to-earnings (P/E) ratio of around 8.2 which would indicate excellent value for money. And with a wide margin of safety, NAHL could be worth buying even though market sentiment is weak following its 26% fall in value over the course of the last year.

The post 3 soaring small-caps: STM Group plc (+12%), Verona Pharma plc (+20%) and NAHL Group plc (+9%) 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?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.