If I had to buy just one small-cap growth stock today, I would acquire professional services firm RPS Group (LSE: RPS). This business certainly isn’t for the faint-hearted and risk-averse though.
With a market capitalisation of only £275m at the time of writing, the firm is one of the market’s smaller companies.
Smaller companies tend to be riskier than large blue-chips because they lack the checks and balances that are in place at larger enterprises. These organisations may also find it harder to access financing in times of stress, leading to problems.
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However, these risks can be offset, to a certain extent, by the higher returns small-cap growth stocks can produce. And that’s why I would buy high-risk, high-reward growth stock RPS.
Growth stock to buy
I can see the risks of investing in this business clearly in its past share price performance. For example, at the beginning of February 2020, the stock was trading at 180p. However, by the end of March, shares in the company had fallen to 30p, a decline of 83%.
Still, past performance should never be used as a guide to future potential. It looks to me as if this global professional services firm has tremendous potential as a growth stock.
Revenues plunged last year as the coronavirus pandemic decimated RPS’s end markets. In the second quarter of 2020, fee revenue fell 18% year-on-year. That was the low point for the business. By the fourth quarter, the year-on-year decline had improved to just 12%. In the first quarter of 2021, fee revenue was £117.5m, just 8% lower than 2020’s figure.
Based on this performance, management announced that the company expects to see revenue growth continue into the second quarter at the end of April. Profit margins are also expected to improve substantially.
The company also believes it is well-placed to benefit from the growing renewable energy market. Consulting revenue from RPS’s UK & Ireland business is already benefiting from a significant pipeline of carbon Net Zero and Data Centre projects.
Risks and challenges
Despite the company’s opportunities and growth potential, it faces significant risks and challenges as well. The pandemic has clearly had a substantial impact on growth. This suggests another global wave of coronavirus could hurt RPS’s recovery.
At the same time, consulting is an incredibly competitive market. RPS is a relatively small player in the sector, which could mean it misses out on large deals and has to spend more to compete with larger competitors.
Despite these risks, I’m encouraged by the group’s recovery over the past 12 months. Therefore, I think this is a growth stock that I would be happy to buy for my portfolio. If RPS’s revenues and profits continue to improve and return to 2018/19 levels, the stock looks cheap. In 2018, the group earned nearly £30m after tax.
There’s no guarantee the company will return to this level of profitability, but I think this figure illustrates its potential.
