Lots of downside risk and little upside potential

And to me, the big picture and overriding issue with the banks is their inherent cyclicality. It looked to me like the rapid rebounding of banks’ share prices during 2009 was all that was worth playing for in terms of a cyclical rebound. My reasoning was that the stock market would likely thereafter compress the banks’ valuations as profits rose over the coming years, which would all drag on further share-price progress. Meanwhile, despite the capped upside, all of the cyclical downside risks would remain in place pending the next cyclical plunge.

And so, it has come to pass. But I can’t claim credit for dreaming up that working theory all by myself. I read it in a book called Beating the Street by legendary fund manager Peter Lynch. I’m glad I did, because his wisdom has helped me lock in profits by selling banking shares after they bounced back from the credit crunch and saved me a fortune in opportunity costs by keeping me out of banks such as Barclays ever since.

You can see how responsive the banks’ shares are to the downside at the merest suggestion of economic headwinds. During the current market weakness, you can bet your bottom dollar that the banks will be leading the charge lower. And one day their profits will crash too, their dividends will be cut, and if you are still holding the shares, you can wave ‘goodbye’ to at least half your capital – many bank shares plunged 95% or so in the last big crash around 2008.

The problem with banks, as I see it, is that they are not proper trading businesses at all, just facilitators of other firms’ businesses that provide the means of moving money around. As such, banks just skim a living from the enterprises of other businesses and individuals. So, if everyone else is doing well, the banks do well. If everyone else is struggling, the banks struggle — they are cyclical beasts to their very core.

Strong trading and growth potential

So, I’d avoid Barclays right now and go for a real business such as DiscoverIE Group (LSE: DSCV). The firm designs, manufactures and supplies customised electronics to industry, which is just the sort of business supplying useful stuff that I think looks set to do well in a new period of economic prosperity that we may experience from where we are now.

In today’s trading update it said that second-quarter trading has been “strong” and in line with the directors’ expectations. Sales in the first half rose 13% compared to the year before, 4% of that organically (suggesting strong customer engagement) and 9% from acquisitions. The order book is up 18% year-on-year. The directors said in the update that DiscoverIE has “a clear organic growth strategy and an active pipeline of acquisition opportunities”, which bodes well for further operational progress ahead, in my view. I think the stock is attractive.

The post Forget Barclays, I’d buy this ‘real’ business amid the market carnage appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Looking ahead, I see good reason to believe this £120m market cap firm can continue to grow its business, juice dividends and deliver continued earnings growth. A good part of my bullishness comes from the bright outlook for the self storage industry as a whole, which is growing rapidly thanks to Britons both buying more things and also spending more time in small flats rather than relatively more spacious homes.

Increased demand for self storage space is clear in Lok’n Store’s full-year trading update released this morning. For the year to July 31, the group saw its occupancy rates rise 7.7% while the price it charged per square foot increased 0.5%. On top of this strong growth from existing locations, the group also expanded significantly by opening three new stores in the year and purchasing five others.

There’s also good potential for future growth as the group increased its access to credit facilities while still keeping the balance sheet in good health with a loan-to-value ratio of just 16.8% as of January 31. Furthermore, the business itself is highly profitable with EBITDA of £3.85m generated in H1 from revenue of £8.82m.

With clear growth prospects and a rising dividend, I think Lok’n Store is a very interesting growth dividend stock, particularly as its shares are currently trading at slightly below their adjusted net asset value of 418p per share.  

Moving up the value added ladder 

Another small-cap that’s delivered substantial shareholder returns of late is Discoverie Group (LSE: DSCV), whose share price has risen over 55% in the past half-decade and sports a solid 2.17% dividend yield as of today.

Discoverie, which used to be known as Acal, is a big player in the field of niche electronic components found in everything from radio frequency chips to high-speed cameras and lasers. Through organic growth and acquisitions, the group has been fast consolidating the fractured market that connects the hundreds of producers of these components to the even larger number of end customers.  

From 2014 to last year, revenue nearly doubled from £211m to £387m, while operating profits quadrupled, thanks to the company’s strategy of moving up the supply chain by using its in-depth knowledge of customers’ needs to produce high-margin niche products by itself. This strategy has led the company’s operating margins to increase from 3.4% in 2014 to 6.3% in 2018 with management targeting 8.5% margins in the medium term.

And after five consecutive years of double-digit earnings growth, management has been able to slowly increase dividend payments while simultaneously investing significant sums in acquisitions and R&D capabilities. With net debt at year-end just 1.5 times EBITDA, the company should be in good shape if the next global economic downturn comes sooner than expected.

At 16 times forward earnings, Discoverie is not the cheapest stock out there, but given its compelling growth strategy and proven ability to increase earnings, I think the stock could be a great one for long-term investors.  

The post Two top growth dividend small-caps that could be millionaire-makers 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 no position in any of the shares mentioned. 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.

The share price hasn’t moved much today (so far), suggesting that the market expected decent trading figures. However, the stock rose around 100% over the last year or so, driven by perky forward earnings projections and a valuation re-rating. That’s a performance that crushed returns from holding a FTSE 100 tracking fund over the period and is a good example of why it can be lucrative to invest in smaller firms outside the footsie as long as we do thorough research first. I think the operational and share price momentum looks set to continue, so I’m hanging onto my shares.

Good figures

Compared to the previous trading year, revenue elevated 11%, underlying operating profit lifted 18% and underlying earnings per share moved 16% higher. The directors expressed their confidence in the outlook by pushing up the full-year dividend by 6%. Chief executive Nick Jefferies said in the report that the firm’s design and manufacturing division achieved “strong” organic growth in both revenue and profits during the year, and an efficiency programme boosted profits in the company’s custom supply division.

The order book moved 12% higher and, in order to cope with the increased demand, the company invested in additional production capacity at sites in India, Slovakia and South Korea. During the current trading year, the directors plan to invest further funds in China and Rotterdam. Looking forward, Mr Jefferies said the new trading year started with “continuing growth in orders and sales” and DiscoverIE is “well positioned” to benefit from the ongoing technology changes unfolding in the firm’s target markets.

Trading up the value chain

The growth agenda seems clear with the firm stating that it aims to increase sales “well ahead” of Gross Domestic Product (GDP) over the economic cycle by “focusing on structural growth markets.” The plan involves shooting for both organic and acquisitive growth and “moving up the value chain” to further increase revenues in the “higher margin” design and manufacture (D&M) division. Progress so far has been brisk, with the company earning around 71% of its operating profit from the D&M division during the year and 29% from Custom Supply. The directors have their sights set on expanding sales in North America and Asia in order to “internationalise the business.”

One of the things I find most attractive about the firm’s business model is that it designs and manufactures “application-specific” components to original equipment manufacturers (OEMs) making DiscoverIE integral to these OEMs’ production processes. Such arrangements lead to high levels of repeat revenue and long-term customer relationships that potentially keep incoming cash flow steady and reliable.

The company’s journey from distributor to specialist designer and manufacturer is transforming its prospects, and I think the growth strategy looks set to drive further investor returns from where we are now. This one is well worth your research time, I reckon.

The post Why I’d buy this growth stock as it crushes the FTSE 100’s performance appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Kevin Godbold owns shares in DiscoverIE Group. The Motley Fool UK has no position in any of the shares mentioned. 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.

Discoverie

Formerly known as ACAL, £301m market cap Discoverie (LSE: DSCV) designs, manufactures and distributes customised electronic products and solutions to businesses across a range of industries. Since I last covered the stock in mid-October, it has risen over 20%. In a year, it’s surged over 60%. The trend here is clearly up. Are there more gains to come?

A trading update released today sounds good, in my view, even if the stock has fallen a few percent this morning. The group advised that, since its last update on 31 January, trading has continued well, with full-year earnings likely to be in line with management expectations, reflecting “strong growth in year-on-year profitability.”

Group sales for the year ending 31 March increased 11% on a constant currency basis, including organic growth of 6%. The Design & Manufacturing division, which generates around 75% of the group’s profits, enjoyed organic sales growth of 11% for the year. The firm advised that group gross margin “continues to strengthen,” and that the order book at 31 March was at a record £122m, 12% higher than last year.

Despite the rise in the share price over the last year, Discoverie’s valuation remains attractive. City analysts expect the group to generate earnings of 24.9p per share this year, which places the stock on a forward-looking P/E ratio of 16.3. A P/E to growth ratio (PEG) of 1.4 suggests that’s a fair price to pay for the growth being generated. Furthermore, a prospective dividend yield of just over 2% adds weight to the investment case. I rate Discoverie as a ‘buy’ at current levels.

First Derivatives

Another hot small-cap stock that investors can’t afford to ignore is big data specialist First Derivatives (LSE: FDP).

Big data refers to the vast amounts of data that businesses generate on a day-to-day basis. Processed and analysed appropriately, it can provide businesses with valuable insights that can improve efficiency and boost profitability. With data volumes growing at an exponential rate, big data is big business, and with its proprietary Kx data analysis software, First Derivatives looks well placed to capitalise. The firm has a long history of working with some of the world’s largest financial institutions, yet is now branching out to others sectors. In February, it signed a deal with a FTSE 100 gaming company to provide data analytics services. The opportunities here are vast. Is now the time to buy the shares?

First Derivatives had a sensational run last year, rising around 100%. When I last covered the stock in late January, I noted that it looked a little expensive on a forward P/E of 64, and said that it might be worth waiting for a pullback. That call was good, as the stock recently fell around 20% from its January high. However, the share price has since stabilised, and I believe it could now be time to take a closer look. The shares are still expensive, on a forward P/E of 49.7, yet the long-term potential here is significant.

The post Two hot small-cap stocks you need to check out today appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in First Derivatives. The Motley Fool UK has no position in any of the shares mentioned. 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.

Bargain hunt

SDL (LSE: MCS) is a stock that share pickers have been flocking away from recently (its share price has dropped almost 20% during the past 12 months). This represents a possible bargain-hunting opportunity, in my opinion.

The Berkshire company — which provides language translation software and services — saw its share price come under huge pressure during the latter half of 2016 following not one, but two profit warnings.

A fresh set of financials on Tuesday has failed to put some snap back into SDL’s market value, proving that the market still needs some convincing. The share was down a further 2% on the day after advising that group revenue slipped fractionally in 2017 to £287.7m, a result that pushed adjusted pre-tax profit 19% lower to £22m.

Commenting on the results, chief executive Adolfo Hernandez commented: “2017 was a period of operational heavy-lifting and it is frustrating that, as we drove our transformation, we were not able to perform consistently in financial terms in all areas of the business.”

Repeating earlier warnings, he added: “Our financial results were impacted by weak gross margins in Language Services in the first half and by software deal slippage towards the end of the period,” although Hernandez affirmed that the company was taking plans to remedy these issues.

Risks outweigh rewards?

As I said, I believe current share price weakness may represent a chance for contrarian investors to pick up a great growth stock for next to nothing. SDL is expected to bounce back with a 36% earnings rise in 2018, resulting in a forward P/E ratio of 15.8 times and a corresponding sub-1 PEG reading of 0.4.

And the IT giant is expected to build on this recovery with an additional 12% bottom line improvement next year.

Having said that, while the language translation market offers ample revenue opportunities, SDL still has a long way to go to get its turnaround strategy firing on all cylinders. So while I believe the firm could prove a lucrative bet for long-term investors, the more risk-averse out there may want to give the company a miss today.

On the charge

Those seeking a secret growth share firmly on the rise may want to check out discoverIE Group (LSE: DSCV).

Unlike SDL, investors have been falling over themselves to buy into the Surrey business of late, meaning its share price has ballooned by close to 80% over the past year. Despite this, discoverIE can still be picked up on a forward P/E multiple of just 15 times and a PEG reading of 0.9 for the year to March 2019.

The electronics play is expected by City analysts to keep earnings growing with a 9% improvement in the outgoing period, and a 17% rise is forecast for next year. And I am confident that, with its Design & Manufacturing arm going from strength to strength (organic revenues here leapt 10% during quarter three), that profits should keep on beating an upward path.

The post 2 secret growth stocks that could make you rich appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The electronics builder and distributor — which from today will be known as discoverIE Group — announced that revenues detonated 21% during the six months to September, to £190.2m, a result that pushed underlying pre-tax profit to £10.4m, up 42%.

And discoverIE, boosted by a solid order book, is confident that it can continue making progress in the near term and beyond. Chief executive Nick Jefferies commented: “The second half has started well and we are on track to deliver full-year performance in line with our expectations, supported by a record order book of £111m.

“Together with an increase in new project design wins of over 30%, with an estimated lifetime sales value of over £90m, we are well positioned for continued growth.”

Meanwhile, discoverIE’s multi-year programme to boost margins by expanding its Design and Manufacturing arm is also delivering the goods. The company saw its underlying operating margin increased by 60 basis points, to 6.2%, during the first half.

Brilliant forecasts

It should come as little shock, therefore, that City analysts expect discoverIE to continue growing earnings at a terrific rate.

In the year to March 2018 a 10% bottom-line improvement is anticipated. And the good news does not end here, a further 8% advance predicted for the following year.

These current forecasts make the small-cap a brilliant value pick too. On top of carrying a forward P/E ratio of 14.4 times, it also boasts a corresponding PEG multiple of just 1.4.

What’s more, today’s release underlined the fact that discoverIE is a growth dividend share that investors should take notice of — the business hiked the interim dividend 8% year-on-year to 2.65p per share on the back of its strong results.

In fiscal 2018 the total dividend is expected to increase to 9.3p per share from 8.5p previously, City analysts are predicting, meaning that discoverIE sports a chunky 2.9% yield. And the yield steps to 3.1% for next year thanks to an anticipated 9.8p reward.

Another growth hero

I also believe that 4Imprint Group (LSE: FOUR) is a share that growth and dividend hunters should seriously consider today.

Supported by an anticipated 9% bottom-line advance in 2017, the company is expected to lift the dividend from 41.82p per share last year to 44.1 cents, resulting in a handy 2.4% yield.

And with earnings anticipated to improve 10% next year, 4Imprint is expected to raise the dividend again, to 48.5 cents, nudging the yield to 2.7%.

Thanks to its broad exposure to North America — a region that produces 97% of group profits — the promotional products manufacturer can look forward to strong and sustained sales growth, in my opinion. That’s even if toughening trading conditions in the UK weigh on its performance at home looking ahead. It said that it had achieved “further encouraging organic revenue growth in both its North American and UK-based operations” in the four months to the beginning of November.

Given its proven knack of attracting new customers across the globe, not to mention its record of keeping its existing clients happy, I believe 4Imprint is a knockout growth share worthy of a toppy forward P/E rating of 22.3 times.

The post One growth stock I’d buy and hold for the next decade appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.