Of course, there are no guarantees when it comes to investing. Here, however, are three minnows that I suspect will have rewarded investors by the time they’re ready to swap the office for the beach.

Future ISA star

As I predicted almost two months ago, online instrument supplier Gear4music (LSE: G4M) released some cracking numbers this week. The business has benefitted hugely from the lockdown with more people than ever learning and practicing music to pass the time. 

Naturally, the share price has reacted positively to news that profits have exceeded management expectations. Whether this momentum will remain near-term is hard to say. The lifting of restrictions could mean earnings have peaked for a while. 

On the other hand, the likelihood that many independent retailers on the UK’s high street will find the going tough could play into the £90m-cap’s hands. Indeed, CEO Andrew Wass has said Gear4music is “confident of continued financial improvements during FY21.“

Regardless of what happens in the rest of 2020, I remain confident this stock could prove a real winner for long-term investors.

Move fast

Another small-cap stock that could reward patient ISA investors is software company Oxford Metrics (LSE: OMG).

Already operating in over 70 countries, Oxford assists firms in measuring and capturing motion. It does this via its infrastructure management-focused Yotta division or movement analysis Vicon business.

What I particularly like about this company is the diversity of its clients. These range from highways authorities needing help to manage road networks to film studios wanting support in creating visual effects. 

Perhaps unsurprisingly, Oxford’s share price hasn’t really recovered from March’s sell-off. It’s still 33% below the all-time high hit back in February.

While recent trading is unlikely to be good, I sense now might be an opportunity for ISA holders to acquire a slice of the business whose fundamentals have been steadily improving. The balance sheet also shows no signs of distress, boasting net cash of almost £11m.

Expensive…but worth it

Last on my list of small-cap opportunities is US-focused software firm Craneware (LSE: CRW). Its tech is designed to highlight operational and financial risks to hospital managers and how they can make things more efficient.

The thing to realise about Craneware is that its valuation has always been high. Despite the recent market crash, shares still trade on a forecast price-to-earnings (P/E) ratio of 31 for FY 21 (beginning in July).

Before dismissing the company, however, it’s worth mentioning that the five-year average P/E is 36. Moreover, Craneware has consistently shown why it deserves its premium rating. Margins and returns on capital are seriously high. It also dominates its niche and carries very little debt. This all piques my interest, even if the adoption of its new analytics platform is taking longer than expected. 

Craneware’s share price could remain under pressure if we get a second Covid wave/market crash. However, I’m having trouble finding reasons to see why it won’t reward ISA investors over the long term.

The post £3k to invest? I’d buy these small-cap stocks in an ISA to retire in comfort appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware. 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.

Reassuringly expensive?

AIM-listed Craneware (LSE: CRW)  develops and licenses computer software for the US healthcare industry that helps hospital managers identify operational and financial risks. It’s a superb company based on its consistently great returns on capital, fat margins, lack of debt and market-leading status.

Unfortunately, holders rushed to sell a couple of months ago after it revealed a big drop in sales that would prevent it from meeting its full-year expectations. The slowdown has been attributed to teething problems relating to Craneware’s new cloud-based analytics platform (Trisus Health Intelligence). 

Having fallen 37% since late June, Craneware now occupies a place on my watchlist. While tempted to buy given the recent price weakness, I’m content to wait for full-year numbers on 3 September before potentially opening a position. The shares still change hands on a lofty 34 times forecast earnings for FY20, after all.

Also reporting next month is a former holding of mine — videogame services provider Keywords Studios (LSE: KWS).

The recent explosion of interest from investors in all-things gaming-related has proven a huge boon for the Dublin-headquartered business with its value soaring 400% from September 2016 to August 2018. Since then, however, the direction of its share price has been less predictable.  

This isn’t to say that Keywords isn’t doing well. In its most recent update, the firm stated that H1 revenue was likely to be around 39% higher at just over €153m thanks to “particularly strong growth” at its Functional Testing and Game Development divisions. Indeed, trading has been so good that the company has been required to expand at a faster rate than expected, requiring additional investment (although this is likely to benefit margins in H2). Adjusted pre-tax profit should come in 15% higher than the previous year at roughly €18.4m.

Perhaps the biggest concern with Keywords is its growth-by-acquisition strategy. This is fine when everything goes smoothly but could come under scrutiny if the firm shows signs of struggling to integrate new parts of its business. For now, the company trades on a steep valuation of 31 times earnings, leaving little room for error. Interim results are out on 18 September.

A final stock that updates next month (interim results, 3 September) is semiconductor wafer producer IQE (LSE: IQE) — another former holding of mine that, regrettably, proved far less successful than Keywords. 

IQE’s stock is currently the most expensive of the bunch at an eye-watering 55 times earnings. That said, analysts are forecasting a treble-digit rise in earnings per share in FY20. If the mid-cap were to achieve this, it would reduce the valuation to 21 based on today’s share price. 

I think this is optimistic, particularly as IQE is currently suffering as a result of the ongoing trade war between Donald Trump and China. It’s already told investors that full-year revenue for 2019 will miss forecasts.

Perhaps unsurprising, IQE remains popular with short-sellers. Worryingly, only Kier Group, AA, Thomas Cook and Wood Group are attracting more attention. That’s not a club any company wants to be a member of.  

Taking all this into account, I’d argue that IQE is the most at risk of crashing in September.

The post 3 highly-valued growth stocks I’d watch out for in September appeared first on The Twelfth Magpie.

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• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware and Keywords Studios. 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.

Should long-term investors treat this as a buying opportunity, or is more bad news likely? Let’s take a look…

An emergency admission

Four months ago, Craneware — which makes billing software for US hospitals — reported “strong sales activity and opportunities” and “increasing market engagement.” Unfortunately, things seem to have gone downhill since then.

In Friday’s profit warning, the company admitted “the timing and quantity of sales” have been lower than expected during the second half of the year. As a result, sales are only expected to rise by 6% this year, compared to forecasts of 18%.

Profit growth will also be lower. Earnings before interest, tax, depreciation and amortisation (EBITDA) are now expected to rise by 10% for the full year.

What does this mean?

Today’s guidance seems to imply Craneware’s growth has come to a halt during the second half. Reading between the lines, I wonder if the firm’s new Trisus product is taking time to gather momentum.

My sums suggest second half revenue is likely to be about $35m — unchanged from the first half of the year. For a company that’s delivered strong growth every year since 2014, that’s a concern.

Before today’s news, CRW shares were trading on a steep 55 times 2019 forecast earnings. I now estimate this forward multiple at about 32.

Although I admire this firm’s high-profit margins and strong growth record, I think the shares continue to look fully priced. Personally, I’d want to look for an opportunity to buy below 1,800p. I’d await further news before making any trading decisions.

Construction delays

I view infrastructure group Costain as one of the best quality stocks in the construction sector. But today’s news shows the company is still prone to the classic problems for investors in this area — delayed contracts and legacy contract costs.

The firm says projects including the M6 Smart Motorway, Preston distributor road and HS2 Southern Section have been affected by delayed start dates. An upgrade to the M4 motorway at Newport was cancelled by the Welsh government earlier this month.

These setbacks mean underlying operating profit for the year is expected to fall by more than 20%, to between £38m and £42m.

In addition to this, the company will face a one-off £9.8m charge relating to remedial works on a contract that was completed in 2006. The sub-contractor that actually did the work has long since gone bust, leaving Costain carrying the can after all this time.

Profit slump

The latest broker note I’ve seen suggests today’s profit warning is likely to result in Costain’s adjusted earnings per share falling by about 30% in 2019, and by a similar amount in 2020. A matching dividend cut is also expected.

These forecasts price the stock on about eight time earnings, with a dividend yield of 5.7%. Given the uncertain outlook and the risk of a construction downturn, I think the shares look fully priced for now.

For long-term shareholders prepared to ride out the storm, I might hold onto the stock. But otherwise, I’d view this as a sell… until better news emerges.

The post Are Costain and Craneware falling knives to catch after 30%+ crashes? appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware. 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.

In response, Boohoo rushed out a statement reporting record Black Friday sales. Management said that profits should be in line with existing City forecasts. But despite this reassurance, Boohoo’s share price is down by 20% so far this year.

If Boohoo can continue to outperform ASOS, then this could be a buying opportunity.

Is Boohoo better than ASOS?

Boohoo and ASOS seem similar at first glance, but there are some big differences. The first is that Boohoo only sells its own products. These are sold under three brands, Boohoo, PrettyLittleThing and Nasty Gal.

By focusing on own-brand sales, management has direct control over the style, price and quality of the products. It is also able to build a valued brand which customers seek out.

I think this is one reason why Boohoo is more profitable than ASOS. Boohoo generated an operating margin of 6.6% over the 12 months to 31 August. For ASOS, the equivalent figure was 4.2%. Now ASOS is warning that this margin will fall to 2% over the coming year.

My verdict

I’m convinced that Boohoo is a better business than ASOS. But is Boohoo a buy?

After recent falls, BOO shares trade on a 2018/19 forecast price/earnings ratio of 39. Earnings are expected to rise by 22% during the current year and by a similar amount in 2019/20.

This gives the stock a price/earnings growth ratio (PEG) of 2.2, according to my calculations. That’s well above the level of 1.2 often used by growth investors to find undervalued stocks.

For investors with a long-term view, Boohoo may still be worth considering. But in my view the shares still look quite fully priced. I’d rate Boohoo as a hold, but I think there are better options elsewhere.

A real buying opportunity?

One stock that’s come onto my radar after recent falls is software group Craneware (LSE: CRW).

This £575m company produces software used in US hospitals. Craneware says that its products help to maximise revenue, control costs and ensure compliance. It’s not hard to see how valuable this could be, given that most American hospitals are privately run.

The Craneware share price has fallen by 35% since mid-September, thanks to the widespread market sell-off. In reality, I think the share price had run ahead of itself at more than £35. But I’m more interested in the stock at its current level of around £22.50.

Very profitable

You see, this is an extremely profitable business. Not only are profit margins high, at about 28%, but Craneware’s customers are generally quite ‘sticky’. Once the firm’s systems are embedded into a hospital’s processes, it’s hard to change to another supplier.

The firm earns revenue through multi-year contracts to supply and support its software. This means that forward earnings are generally very predictable.

Earnings per share have grown by an average of 14% per year since 2014, and this rate of growth is expected to continue. The dividend yield is modest at just 1.3%, but the payout has grown by nearly 13% per year, providing attractive income growth.

As with Boohoo, Craneware shares look fully priced on 39 times forecast earnings. But in my view this is a much better quality business with more robust profits. I’d consider buying these shares at current levels.

The post The Boohoo share price has fallen 20% in 2018. Will it bounce back in 2019? appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group and Craneware. 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.

“Explosion of demand”

It’s hard not to be impressed by the numbers. Chalking up its eighth consecutive year of growth, income at the mid-cap more than doubled to $341.2m, thanks to a 127% rise in income from cases. Net profit after tax jumped 130% to just under £265m while return on equity (how much profit Burford makes with each pound of shareholders’ equity) climbed to 37.4% compared to £21.1m in 2016.

Commenting on today’s figures, CEO Christopher Bogart reflected that the company had seen an “explosion of demand” for the company’s capital, resulting in new commitments of $1.34bn. Now boasting a “widely diversified portfolio“, Burford has $3.3bn invested (and available for investment) and $1.7bn in assets under management.

Looking ahead, 2018 looks like being another strong year. In sharp contrast to the minuscule $1m employed over the first two months of the previous year, the company has already committed $128.5m to 12 new investments so far. In addition to this, Burford revealed yesterday that it had sold its Teinver investment for $107m in cash — realising a $94.2m gain and a stonking 736% return on capital.

Clearly, any company performing as well as this is likely to become increasingly expensive for investors to acquire going forward. That said, I’d be tempted to wait for the inevitable period of profit-taking to pass before taking a position.

As a stock to buy and hold for the long term, however, Burford continues to look like a great option.

High riser

Another company that’s been over-achieving recently is £515m-cap Craneware (LSE: CRW).

Shares in the business — which produces software for the fast-evolving US healthcare market — have soared 63% over the last year alone. Interim results, released earlier this month, go some way to explaining why.

The bad news? It should come as no surprise that the cash-rich firm is looking fully valued right now, with stock changing hands for an eye-popping 49 times forecast earnings. As to be expected with high growth companies, there’s also little in the way of dividends, even if recent double-digit hikes are encouraging.

For these reasons, I’d be tempted to keep this company on my watchlist for now in the hope that another general market wobble may provide a better entry point.

The post 2 high-flying growth stocks I’d consider buying for the long term appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware. 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.

And while many investors may view this dip as a buying opportunity — for example, a full 12 of the 14 analysts covering the stock rate it a Buy or Outperform — I still view at as dangerously overpriced, at 61 times forward earnings. For a company that offers low barriers to entry and trades in a notoriously cyclical industry, such brands can fall out of favour just as quickly as they became a hit.

What started the recent sell-off in Boohoo’s shares was management’s guidance back in September for full-year EBITDA margins to fall to around 9-10%, below prior guidance and current period results. The reasons for lower margins was the group’s decision to invest in marketing for its newly- acquired brands, keep prices lower than competitors for the core Boohoo brand, and invest in expanding its distribution arm.

While it’s good to see management investing in the brand’s future, I worry that needing to aggressively keep the cost of its clothing low, while also diversifying into new brands, means we may be looking at a hard ceiling on the group’s profitability. After all, Boohoo primarily competes on price and there are myriad of competitors offering similar merchandise that have found selling £15 dresses online is fairly easy to do.  

This wouldn’t be a problem if it weren’t for the group’s eye-watering valuation. If management can’t substantially increase margins it will have to continue to grow revenue at an astronomical rate if it’s to ever grow into its valuation. And while management has thus far had little problem recording high levels of growth, that will naturally become harder as it grows in size. Furthermore, if investors begin to believe margins will be permanently low, it will only take one or two quarters of slowing top line growth for them to re-evaluate the hefty growth premium they have awarded Boohoo’s share price.

Slow but steady wins the race

A much more interesting growth share in my eyes is healthcare software provider Craneware (LSE: CRW). While the company isn’t cheap, at 41 times forward earnings, it offers investors deep barriers to entry, a proven track record of increasing revenue and margins over time, and a huge growth market in the form of a US healthcare industry desperate to trim costs.

Half-year results released this morning show the group’s growth is continuing at a good clip, with revenue up 16% year-on-year to $31.1m, and adjusted EBITDA up 18% to $9.7m. Thanks to highly-visible recurring revenue, we also have a very good picture of where the company’s going. Over the next three years, a full $179.4m of revenue is already contracted while the group’s order book is at record levels as it wins over new hospital groups and introduces new software to existing clients.

And there’s good scope for profits to continue rising ahead of sales as the benefits of scale roll in. While the company may be valued highly, I reckon these positives — and a huge net cash position — make Craneware one stock I’d own for the long term.

The post Why I’d ditch plummeting Boohoo.com plc for this fast-rising growth star appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo.com and Craneware. 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.

But they’re big business these days, with trendy drinkers wanting all sorts of variations rather than just the traditional soda water, tonic, etc.

But three things convince me the bull run is coming to an end, and I’d sell if I owned any.

You know the idea that when even the folks down the pub are talking about a stock, it’s time to sell? I witnessed the equivalent on TV last week — I wasn’t paying attention, but some ‘reality’ person said their favourite drink would be something or other “with a nice Fevertree mixer.” 

Competition

Another thing is that I really don’t see a defensive moat around Fevertree’s business model, and nothing to prevent other makers moving into the premium mixer market (which they’re already doing).

Finally, it’s the share price chart itself and the shares’ fundamental valuation. I’ve seen the same thing happening to growth darlings just too many times, and it almost always ends in a crash after the climb. Fevertree shares have already shown their first sign of weakening with a dip towards the end of 2017 — it’s come back, but that often signals the final wave of bandwagon buyers.

The initial rapid EPS growth is set to slow, with just 9% on the cards for 2018 — yet with the shares at 2,316p, we’re still looking at a forward P/E of 54. I really see that as overvalued now, and I’d walk away.

Another climber

Healthcare software specialist Craneware (LSE: CRW) has been a success for shareholders too, with its shares up fourfold in five years to 1,715p.

Its earnings growth has been at a more leisurely pace than Fevertree’s, but investors have high hopes of it continuing for many years to come. And I reckon a forward P/E of 35 based on June 2019 forecasts has just become a good bit more attractive.

The company has announced two new hospital contracts with new US customers, and they look like they could have some serious potential. We don’t know the names of them yet, but one is “a large blue-chip healthcare provider” which will use Craneware’s products in its 20 hospitals.

Craneware says this will be as “an integral part of this provider’s major system change“, which sounds like it’s in at the beginning and could be a long-term partner. The deal should bring in revenue of around $5m in its initial multi-year term.

The second new agreement, estimated to be worth around $3.5m in its initial term, is with “an innovative surgical hospital” and involves the supply of a number of Craneware’s software packages.

Continuing trend

This comes on the back of a number of other contract wins, with the most recent announced in January expected to provide $16m in revenue over five years.

At the same time, the firm told us it expects EBITDA to come in 15%-18% ahead for the six months to December 2017. The balance sheet looks good too, with cash of more than $50m on the books.

There’s clearly some momentum behind Craneware right now — in its share price, and more importantly, in its contract developments too. I see good long-term value.

The post A soaring growth stock I’d buy ahead of Fevertree Drinks plc appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware. 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.

With that in mind, here are two stocks which could deliver rising share prices in future. As such, they could be worth buying today.

Improving performance

Reporting on Monday was US healthcare market Value Cycle solutions specialist, Craneware (LSE: CRW). The company announced that it has continued to perform strongly in the first half of the year, with its growth strategy successfully executed. Renewals by dollar value have continued at over 100% during the period. It now expects to report an increase in both revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of between 15% and 18% for the six months to the end of December 2017.

The company also reported a significant contract win on Monday that’s expected to deliver in excess of $16m of revenue over its initial five-year term. This could prove to be a positive catalyst for a company which has been able to deliver double-digit earnings growth in the last three financial years. This consistently high growth in profitability could show that Craneware is worthy of a premium valuation in the long run.

With the stock currently trading on a price-to-earnings (P/E) ratio of around 38, it seems to be popular among investors. While there may not be scope for a significantly higher rating, the stock’s earnings growth potential remains high. This could propel its share price upwards in the long run.

Upbeat outlook

Also offering growth potential in the healthcare sphere is Alliance Pharma (LSE: APH). The acquirer and licensor of pharmaceutical products has a long track record of delivering growth. It has been able to do so in four of the last five financial years, and this trend looks set to continue over the medium term. In fact, the company is forecast to record a 15% rise in 2018 earnings, which could cause investor sentiment to improve significantly.

Despite a rise in its share price of 38% in the last year, Alliance Pharma trades on a price-to-earnings growth (PEG) ratio of just 1. This suggests it offers a wide margin of safety, which could lead to a higher rating in the long term.

With the company having a stable growth outlook, it may also be seen as a relatively defensive stock. Certainly, it appears to lack a high degree of positive correlation with the wider index and with the economy. This could help investors to diversify at a time when the political risk facing the UK continues to build. As such, now could be the perfect time to buy the stock for the long term.

The post 2 promising small-cap stocks that could be millionaire-makers in 2018 appeared first on The Twelfth Magpie.

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• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares in Alliance Pharma and Craneware. The Motley Fool UK has recommended Craneware. 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.

Encouraging results

As a result of its focus on the US healthcare industry, £400m cap software provider Craneware (LSE: CRW) may not be a business on many UK investors’ radars (at least for now). Recognised as a leading provider of “revenue integrity solutions“, the company dedicates itself to improving the financial performance of the one in four hospitals it currently serves. 

At the end of last month, it was announced that “a growing hospital operator” had both renewed and significantly expanded on its contract with Craneware. Worth $6m, the new agreement will involve implementing the company’s solutions in a number of new facilities recently acquired by the hospital network.

Today’s AGM statement built on this good news by reporting that the company had experienced a “positive start” to trading in the current financial year, no doubt helped by the favourable market reaction to June’s launch of Trisus Claims Informatics — the first product on the company’s cloud-based platform. The Edinburgh-based business also reported observing “very encouraging results” for early adopters of its cost analytics product that is currently under development. 

Over the last two years, Craneware’s stock has doubled in price. As such, it won’t come as a surprise to learn that the company now commands a high valuation. But while a forward price-to-earnings (P/E) ratio of 37 implies that a lot of positive news already appears factored-in, I think the company’s track record of achieving consistently high operating margins and returns on the money it invests go some way to justifying this. Add a rock solid balance sheet and “high levels of revenue visibility” to the mix and I suspect Craneware could still generate a very decent return for new investors. 

Record revenues

Another company whose star appears to be rising is digital performance marketing specialist XL Media (LSE: XLM). A quick scan of September’s interim results helps to explain why the Jersey-based company’s stock has already rocketed 73% in price over the last year.

In the six months to the end of June, the business achieved record revenues of just under $69m — a 33% jump on the same period in 2016 —  driven mostly by excellent organic growth in its publishing division. Pre-tax profit rose 23% to $19.5m.

No stranger to acquisitions, XL purchased Canadian credit card comparison website Greedyrates and US financial services website Moneyunder30 over the reporting period. US cybersecurity comparison site Securethoughts was also acquired and, given the growth currently being experienced in this area, could become hugely valuable over time.

Like Craneware, XL Media possesses a suitably strong balance sheet ($43.1m cash) and generates excellent returns on sales and the capital it employs. As a bonus, the latter’s stock also comes with a really-rather-decent 3.6% yield — a rarity for a growth-focused company.

The only slight drawback I can see at the current time is XL’s current valuation. Given the importance of comparing like with like, the stock looks fairly expensive relative to industry peers at 16 times forecast earnings. As such, investors may wish to wait for a general market correction before adding the stock to their portfolios.

The post These ‘secret’ growth stocks could still make you stunningly rich appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware. 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.

However, GlaxoSmithKline (LSE: GSK) appears to be somewhat anomalous in that respect. It has a potent mix of income, value and growth potential which could see it outperform the wider index over the long run. As such, within a healthcare sector that contains a number of stocks with high valuations, it could be worth buying and holding for the long run.

Growth potential

While the company has experienced a somewhat mixed number of years that have seen its bottom line decline at times, the outlook for the business appears to be positive. There has been significant investment in its pipeline which has created growth opportunities for the long term. It has also rationalised its pipeline, with around 33 programmes set to be cancelled. This should allow the company to focus to a greater degree on the opportunities which present the best risk/reward ratios for the long run.

Income prospects

A growing bottom line could allow GlaxoSmithKline to increase dividends payments over the medium term. It has held dividend payments steady at around 80p per share in recent years, but with its dividend coverage ratio expected to be around 1.4 in 2017, it could afford to pay a higher proportion of profit to investors and retain its reinvestment potential. This could boost its income prospects and make its 5.8% dividend yield seem even more attractive to investors.

Value

With GlaxoSmithKline trading on a price-to-earnings (P/E) ratio of 12.4, it seems to offer a wide margin of safety. That’s especially the case since it is a diversified business which has a number of different growth avenues in the long run, with its vaccines, pharma and consumer goods divisions offering the potential for rising earnings in future.

This valuation compares favourably to other healthcare companies, such as Craneware (LSE: CRW). It has a P/E of 38.5 and yet is forecast to record a rise in its bottom line of just 5% in the current year.

The value cycle solution specialist in the US healthcare market announced the renewal and significant expansion of an existing contract with a growing hospital operator on Tuesday. The $6m win is expected to deliver $3.5m of incremental revenue over the next five years and shows Craneware is making progress with its strategy.

It has a strong position within its key markets and could post continued growth in earnings over the medium term. However, with such a high valuation, it seems to be worth avoiding at the present time.

By contrast, GlaxoSmithKline’s mix of income, growth and value marks it out as a strong investment opportunity within the healthcare space, and it may be worth holding for the long term.

The post Why GlaxoSmithKline plc is a growth bargain I’d buy and hold for 25 years appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Craneware. 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.