This small-cap growth stock could be a millionaire-maker in 2018

Patisserie Holdings cake

Finding the best opportunities to boost your portfolio returns can be tough. After a Bull Run that has seen the FTSE 100 more than double within the last nine years, it is arguably now more difficult than ever. Indeed, a number of larger companies appear to be relatively overvalued and this may prompt a period of disappointing share price performance.

As such, it may be worth considering smaller stocks. While they may be riskier than their large-cap peers and lack diversity, they may also deliver higher rewards over the long run.

Investment potential

Reporting on Friday was UK-based online retailer of musical instruments and music equipment Gear4music (LSE: G4M). The company’s four months to the end of 2017 were relatively positive, with UK sales increasing by 25% versus the same period of the prior year. Outside of the UK, the company’s sales grew by 69%. This means that revenue was 42% up on a group basis, which suggests that the strategy employed by the business has been successful.

This impressive period follows a strong first half of the year, where 44% sales growth was achieved. Active customer numbers increased by 38% while website conversion was up to 3.3% from 3% in the prior year. These figures indicate that further growth could be ahead for the business.

Looking ahead, Gear4music is forecast to post a rise in its bottom line of 31% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of 1.9, which suggests that it offers good value for money at the present time. With the business being diverse and having the potential to offer sustainable double-digit growth in the long run, now could be the perfect time to buy it.

Strong momentum

Also offering an impressive outlook at the present time is Patisserie Holdings (LSE: CAKE). The café operator has been able to grow its bottom line by 20% and 19% respectively over the last two years. This is despite a somewhat uncertain outlook for the UK economy, where consumer confidence has declined.

Looking ahead, trading conditions could remain tough for the business. Inflation has moved ahead of wage growth, and this means that consumers have less disposable income available in real terms. This could negatively impact on sales growth, while higher inflation may cause input costs to rise at a faster pace than they have done in recent years. The effect of this could be a squeeze on the wider consumer goods sector.

However, with Patisserie Holdings forecast to post a rise in its bottom line of 12% in the current year, it appears to offer strong growth potential. Its PEG ratio of 1.6 indicates that it could deliver capital growth over the medium term. And with a solid growth strategy, the business looks set to continue its expansion in the coming years. As such, now could be an opportune moment to buy it.

Finding the best stocks in 2018

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Patisserie Holdings. 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.

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