If youre looking for higher investment returns, it can pay to have a little bit of exposure to small-cap stocks in your portfolio. Small-caps are generally riskier than large-caps just look at what has happened to Sirius Minerals recently however, pick the right stocks, and you could boost your wealth significantly. With that in mind, heres a look at one exciting smaller company I believe could provide strong returns over the long term.
Keystone Law
Keystone Law (LSE: KEYS) is a next-generation law firm with a unique, technology-driven business model. Unlike traditional law firms, Keystone hires lawyers who work from home, or from their own offices. The company then provides these lawyers with all the administrative support they need from its Central London head office, while taking a cut of the revenues generated.
I think this is a really attractive business model because its so scalable Keystone currently has around 300 lawyers on its books but, given that its lawyers work remotely, whats to stop it having 3,000? In fact, the company says its addressable market is potentially 47,000 lawyers, which suggests theres plenty of room for growth.
Strong growth
Speaking of growth, Keystone has expanded substantially in recent years (it has grown its top line by 104% over the last three years) and Septembers half-year results showed further progress. For the six months to 31 July, revenue increased 15.3% to 23m, adjusted profit before tax jumped 15.4% to 2.7m, while basic earnings per share climbed 14.5% to 6.3p.
In addition, not only did the group declare an ordinary dividend of 3.2p, but it also rewarded investors with a special dividend of 8p. CEO James Knight said the results provided clear evidence of the groups ability to scale and also advised that the performance underpinned its confidence in the second half of the year.
High-quality attributes
Aside from its prolific growth, there are a number of things that impress me about Keystone Law. First, return on equity (ROE) is high this metric has averaged 25% over the last two years. In other words, Keystone is a very profitable company.
Second, cash flow is strong and the dividend payout is growing. The recent special dividend suggests to me the stock could turn out to be a cash cow. Third, the balance sheet is robust with minimal debt on the books. Overall, I see Keystone as a high-quality company.
Ill also point out that founder and CEO James Knight owns a large chunk of the shares, meaning managements interests are likely to be aligned with shareholders interests. Thats another big plus, in my view.
Im a buyer
On the downside, the shares arent exactly a bargain. With analysts forecasting earnings per share of 14.5p for the year ending 31 January, the forward-looking P/E ratio is 34.7, which means there isnt a huge margin of safety.
However, given the attractive growth story and the groups high-quality attributes, I dont see the high valuation as a deal-breaker. With the stock still very much under the radar, I think its a good time to be buying.
Under-The-Radar Investment
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