Anyone with experience of AIM investing will understand why London’s junior market is often referred to as the Wild West of investing. But, while many of these small caps inevitably end up wildly underperforming high expectations, there are companies on the exchange that share key Foolish characteristics that make me positive on their potential in 2017 and beyond. Both Fevertree Drinks (LSE: FEVR) and YouGov (LSE: YOU) are profitable, highly cash generative founder-led businesses that also offer stellar long-term growth potential.
Fevertree is well known to small-cap investors as shares of the maker of premium drink mixers have risen over 550% in value since listing in late 2014. Shares have appreciated so rapidly for good reason as sales and profits have been growing at a stunning clip. In the first six months of 2016 revenue rose 69% and EBITDA 72% year-on-year.
The reason Fevertree has been able to grow so quickly is a business model that outsources the low margin work of bottling and distributing drinks to third party partners. This leaves Fevertree management free to concentrate on building brand awareness and expanding into new countries. This also leaves Fevertree the most profitable bit of the business, which is why operating margins rose to 29.2% in the first half of 2016.
Looking ahead, I see few reasons for this record of strong growth and healthy financials to end soon. Interim results saw sales in the company’s most mature market, the UK, grow a whopping 108%. This leaves me bullish that growth can also continue for a long time to come in international markets, which already make up 60% of revenue.
Furthermore, management’s Q3 trading update buoyed bullish investors by disclosing that trading was ‘materially ahead of market expectations’. Shares may be pricey at 50 times forward earnings but with a growing cash pile, a founder-led management team and a favourable forward outlook, I expect big things from Fevertree in 2017.
Data diversification
Polling and market research firm YouGov (LSE: YOU) has also been performing well as steadily increasing sales and profits have sent share prices up over 425% in the past five years. The secret to YouGov’s success has been diversifying away from solely providing the custom polling for which it’s known into selling access to the troves of data it holds about consumer opinions on myriad subjects.
Revenue from these new data offerings grew a full 32% year-on-year in 2016 and now accounts for roughly 40% of total sales. I, and the market, are bullish on these data services and products for several reasons. The obvious one is that sales are growing at a rapid clip. But, even more important is that they’re very profitable. Operating profits from the new data divisions clocked in at 28% in the past year, more than twice the 13% from the traditional custom research segment.
Furthermore, the long-term potential from this division is rather astounding as YouGov moves into new international markets and signs further contracts with giant multinational companies. Every company big and small these days is obsessed with data, and YouGov has found selling access to its staggering amount of information very profitable indeed. With net cash on the balance sheet, steady growth and a founder-led management team, I believe 2017 will be another good year for YouGov.
