Huge earnings growth coupled with small market capitalisations mean that investors willing to venture lower down the market spectrum can often be rewarded with returns that crush those who prefer the perceived safety of companies in the main indexes.
With this in mind, let’s take a look at two new(ish) stocks on the block and ask whether they are likely to perform strongly over the short term.
Driving returns
Specialising in driving titles — including the Formula 1 franchise — developer and publisher Codemasters Group (LSE: CDM) is the latest option available for those wanting to take advantage of a booming gaming sector after coming to market only a few weeks ago.
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Although the shares have lost some of their early momentum, the current price of 252p still represents a 26% gain on the IPO, suggesting that many are attracted to the company’s desire to bring in more staff and potentially undertake an acquisition spree with the money it’s received.
Given the resilient nature of the industry and the growing popularity of eSports, it seems reasonable to assume that Codemasters could do well for investors. That said, it’s important to go in with eyes wide open.
With stock-specific risks not disimilar to those of other new market entrants Sumo and Team 17, the company has been transparent in stating that its success depends heavily on the popularity of its titles and the renewal of licences going forward. Prospective buyers should also bear in mind that a market cap already in excess of £350m means that doubling the Warwickshire-based business’s share price in a single year is no mean feat.
Personally, I still believe that the best (and least risky) way of gaining exposure to this industry remains diversified ‘picks and shovels’ services provider Keywords Studios — a firm whose stock continues to mock the concept of gravity.
Unlocking profits
Although not quite as fresh on the market as Codemasters, challenger law firm Keystone Law (LSE: KEYS) is another intriguing option for growth-focused investors, especially those who may have missed the huge gains achieved by AIM-listed litigation finance specialist Burford Capital.
Shares in the strongly cash-generative 16-year-old company, whose clients include Nationwide, Royal Bank of Scotland and Wonga, have been on sparkling form since coming to the market last November, rising 67%. How many FTSE 350 firms can top that?
April’s full-year results suggest this might be only the beginning.
Revenue jumped a little under 24% to £31.6m in the 12 months to the end of January with underlying earnings before interest, tax, depreciation and amortisation (EBITDA) coming in at £3.27m — almost 43% higher than the £2.29m achieved in the previous financial year. Perhaps unsurprisingly, these numbers were recognised as being “comfortably ahead” of what the market was expecting.
CEO James Knight is certainly bullish on the small-cap’s outlook, having remarked that the £100m cap is“well-positioned to take advantage of the significant market opportunity in the UK legal services market”. The fact that it operates a Purplebricks-like model of allowing staff to work remotely is clearly turning heads with the number of fee earners increasing from 228 to 266 over the reporting period.
Trading on 31 times earnings for the current financial year, there’s little room for error. Nevertheless, should the company continue to outperform, I think it certainly stands a chance of doubling in value within the next year.
