Often, the growth potential of a stock turns out to have been over-egged, or a case of the emperor’s new clothes, and investors end up with a substantial loss. In these situations, three things we commonly see flaws in are the business, the transparency of its financial reporting, and its market valuation.

With this in mind, three stocks I’m currently avoiding are Purplebricks (LSE: PURP), First Derivatives (LSE: FDP) and Telit Communications (LSE: TCM).

Purplebricks

Business: I’ve serious doubts about the long-term viability of online estate agent Purplebricks, due to diminishing revenue returns from increasing marketing spend. In its latest financial year, it eased back modestly on UK marketing in the second half, and saw second-half revenue plunge by £6.5m. It also swung to an operating loss.

Reporting: Purplebricks refuses to disclose the number of its instructions that result in a completed sale. I’ve seen an increase in dissatisfied customers on Trustpilot recently. ‘Bad’ ratings in the last 475 reviews are running at three times the historical rate. I suspect this is a further indication the business is going backwards.

Valuation: At a share price of 110p, Purplebricks is valued at £337m. This is 2.8 times my estimate of trailing revenue of £119m from continuing operations. The rating is far too high, in my view.

First Derivatives

Business: New technology is a sector to which investors seeking millionaire-maker stocks are naturally drawn. Companies in the sector can readily fashion impressive-sounding growth stories. A few buzzwords, a collaboration with a tech giant, and talk of multi-billion-dollar addressable markets can do wonders for investor excitement. Fintech and martech specialist First Derivatives is a case in point.

Reporting: The company’s accounts came in for severe criticism last year from renegade City analyst Matt Earl’s ShadowFall outfit. While First Derivatives has been valued as a high-performing software company, ShadowFall reckoned that on a true view of the accounts, it has the characteristics of a low-margin consultancy or recruitment business.

Valuation: When paper profits are questionable, my default valuation measure is free cash flow. First Derivatives generated around £6m last year. Against this, its market valuation of £574m at a share price of 2,150p is far too rich in my book.

Telit Communications

Business: Another new technology stock is “global enabler of the Internet of Things” Telit Communications. It sold its automotive solutions division earlier this year, reduced its debt, and reported a net cash position at the half-year end.

Reporting: Back in 2017, I showed how Telit’s accounting enabled it to post impressive paper profits, while generating little or no free cash flow. A few months later, founder and chief executive Oozi Cats and his wife Ruth (apparently on the payroll as an ‘art curator’) were exposed as fugitives from historical fraud indictments, and high-tailed it out of Dodge.

Valuation: Cats remains at large and a major shareholder (dealing in the stock as recently as last month). But with new faces in the boardroom, how should we value the remnants of his empire? At a share price of 155p, the market says £206m. I say, show me the free cash flow to justify it.

The post 3 stocks I’d avoid at all costs appeared first on The Twelfth Magpie.

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G A Chester 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.

Ahead of forecasts

First Derivatives provides software to financial institutions and, increasingly, to other industries. It reported a 20% increase in first-half revenue to £105.6m, and a 12% rise in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA), to £18.1m. Management expressed its confidence in the group’s growth prospects, saying: “We expect to deliver revenue and adjusted EBITDA slightly ahead of consensus forecasts for the year to 28 February 2019.” These forecasts were £213m and £38.5m, respectively.

I reckon the guidance translates into adjusted earnings per share (EPS) in the region of 85p (H1 was 41p). This would put the stock on a price-to-earnings (P/E) ratio of 41, at a share price of 3,500p. The price is around the same level as this time last year when my colleague Edward Sheldon was reluctant to add to his personal shareholding.

While the forecast EPS is now higher than when Ed was writing, I’m not convinced that the P/E and a prospective dividend yield of 0.8% represent good value. As such, it’s a stock I’m content to avoid, simply on valuation grounds, without having to consider criticisms levelled in recent months by short-seller ShawdowFall. Among them were the company’s accounting (including “shielded costs from its P&L”), the nature of its Kx Tech Fund (“at worst, we believe this could be viewed as straightforward vendor financing”), and corporate governance (“KPMG Belfast has been auditor to FD for over nineteen consecutive years”).

Blue-chip bargain

I’m much more confident that there’s great value on offer over at £17bn-cap blue-chip BAE Systems. The consensus among City analysts forecast an EPS posting of 43p this year, increasing by 9% to 47p in 2019. At a current share price of around 520p, the P/E is just over 12, falling to little more than 10 next year. Dividend forecasts of 22.7p, followed by 23.6p, give a yield of 4.4%, rising to 4.5%, continuing a record of steadily increasing payouts for shareholders.

I reckon October’s stock market slump and concern about the UK’s relationship with Saudi Arabia (an important customer for BAE) in the wake of the murder of journalist Jamal Khashoggi, have created the current investment opportunity. I don’t expect either of these factors to impact on BAE’s long-term future, which I see as underpinned by defence spending which is only likely to increase in the coming decades.

The near-term outlook is also good, according to the company. It said in its half-year results: “With a large order book and a positive outlook for defence budgets in a number of key markets, we have a strong foundation to deliver growth and sustainable cash flow.” As such, I rate the stock a great ‘buy’ today.

The post The BAE share price has slumped over 20%. Is it time to buy? appeared first on The Twelfth Magpie.

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G A Chester 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.

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.

UK investors could feel a little aggrieved. The FTSE 100 is full of banks and oil stocks, which haven’t seen the same level of gains.

Having said that, the UK is home to some very exciting technology companies at the smaller end of the market. And several of these stocks have generated stratospheric gains over the last 12 months. Here’s a look at two such companies.

The robots are coming

Blue Prism (LSE: PRSM) is a leader in ‘Robotic Process Automation.’ It enables blue-chip companies to create digital workforces powered by software robots that are trained to automate routine back-office tasks. Customers include IBM, Nokia, Aegon and Procter & Gamble.   

The concept sounds pretty exciting to me. So are the shares a good investment?

The thing to understand about Blue Prism is that while the company is generating strong sales growth right now, it’s not yet turning a profit. To my mind, that makes the investment case a little riskier.

Full-year results released this morning show revenue of £24.5m, an increase of 155% on last year. The group secured 609 new software deals over the year. These numbers look good.

Yet, on the downside, the tech firm generated an adjusted EBITDA loss of £8.3m, which is obviously not ideal. And it also announced two proposed placings to raise £40m and £30m, which will dilute existing shareholders’ stakes.

Overall, I’d say Blue Prism is a ‘speculative’ stock. The growth story looks exciting, yet with no profits, shareholders may experience a wild ride.

Explosive data volumes

One tech stock that is generating profits is big data specialist First Derivatives (LSE: FDP). The company builds software for the ultra-high-speed processing of large volumes of data.

First Derivatives has a long history of working with the world’s largest financial institutions, yet is now deploying its technology into other sectors such as energy and transport. As a result, the stock has been getting attention recently and its share price has surged almost 100% over the last year. Is it too late to buy now?

I’m attracted to the long-term story here. Revenue and profits have been growing at an impressive rate, and are expected to keep growing. For the year ending 28 February, analysts expect revenue and net profit growth of 18% and 78% respectively.

Having said that, the shares do look expensive at the moment. On a forward P/E of a high 64, I’m not convinced there’s much value in the stock at present, even though I’m a shareholder myself. That multiple simply doesn’t leave much room for error. In my view, investors may be better off waiting for a pullback here before committing capital.  

The post Amazon and Facebook aren’t the only tech stocks soaring right now appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in First Derivatives. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Facebook, and Netflix. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.

First Derivatives

First Derivatives (LSE: FDP) is a big data specialist. The company’s goal is to provide its customers with efficient and flexible tools for ultra-high-speed processing of data. Its key product ‘Kx’ was designed to address one of the most basic problems in high-performance computing: the inability of traditional database technology to keep up with the rapid escalation of data volumes.

The £890m market cap company has a long history of working with some of the world’s largest financial institutions. However, in recent years, its technology has been used by clients in other sectors, such as the wider technology sector and energy. Just yesterday, the group announced that it has been selected by Red Bull Racing to analyse data from its Formula 1 vehicles.

A glance at the company’s financials reveals formidable recent growth. Indeed, over the last five years, revenue has climbed from £46m to £152m, and adjusted earnings per share have risen from 37.5p to 61.3p.

Half-year results released today reveal further progress. For the six months to 31 August, revenue increased 21% to £87.8m, and adjusted earnings per share climbed 19% to 34.4p. The company stated that it has a “strong pipeline” and that it had made a “positive start” to the second half of the financial year. Chairman Seamus Keating commented: “We anticipate a strong full-year financial performance, slightly ahead of the Board’s expectations.”

I bought shares in First Derivatives at a price of around 1,600p early last year. Today, they change hands for 3,520p. Would I buy more of the stock at the current share price? If the company can perform similarly in the second half of the year and generate full-year earnings of 68.8p, the forward P/E ratio is 51.2 right now. Personally, I’d be reluctant to add to my holding at that price. I’m really excited by the potential here, but after a 60% year-to-date share price rise, I’ll be waiting for a pull-back before buying more shares.

A cheaper tech stock

One tech stock that does look attractively valued right now, in my opinion, is Micro Focus (LSE: MCRO). The £11.5bn market cap group helps customers merge new technology solutions with existing IT infrastructure systems. I last covered the stock in late August, when it was trading at 2,270p. Today, it sits at 2,655p. However, despite the 17% share price gain, I believe there’s more to come.

The company’s merger with Hewlett Packard Enterprise (HPE) is set to create one of the largest tech firms in the UK. Investors have been concerned that Micro Focus might have overpaid and overstretched to buy HPE, however, the latter’s Q3 results released recently were received well by the market.  

Going forward, I believe Micro Focus has the potential to reward long-term investors with both capital gains and dividends. The stock trades on a forward P/E of a reasonable 16.8, and a prospective dividend yield of 2.9% adds weight to the investment case.

The post This growth stock has made me thousands. Is it too late to buy now? appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in First Derivatives. The Motley Fool UK has recommended Micro Focus. 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.

By buying up small carpet manufacturers and combining back office functions, increasing purchasing power and consolidating manufacturing facilities, it has dramatically increased its sales and cash flow in recent years. Management has re-invested these proceeds back into new acquisitions that have led the firm’s sales to leap from £70.9m in 2013 to £255m in 2016.

Cost savings from combining these back office functions have also led to EBITDA margins rising from 5.8% to 12.6% in the same four-year period. And although margin growth is likely to moderate in the coming years, there’s still room for profits to grow at a rapid clip as newly-acquired businesses are integrated and the company sets its sights on the massive European flooring market.

Victoria took its first tentative steps across the Channel with the purchase of two Dutch artificial grass manufacturers earlier this year for £9.7m. If past acquisitions are anything to go by, Victoria’s management team will use its existing UK distribution networks to increase cross-selling of artificial grass as well as using the new European links to begin selling its UK-made carpets into Europe.

It’s still far too soon to say whether this move will work out, but given the company’s phenomenal success with previous acquisitions, I’m quite optimistic. Add in a profitable business with low leverage and a highly-skilled chairman who owns 29% of the shares and I’d take a close look at Victoria today while its shares trade at a very reasonable 19 times forward earnings.

Diversifying for long-term growth 

Another wildly successful AIM share that I reckon could continue to grow for many years to come is tech firm First Derivatives (LSE: FDP). As its name suggests, the company started off providing software to the finance industry and its flagship Kx data analysis software has proven a hit with banks, regulators and stock exchanges over the years.

Repeated double-digit sales growth has powered the group’s shares up over 490% in the past five years alone. And while sales to the finance industry are still going strong, up 30% year-on-year in the year to February alone, I reckon it’s the group’s non-financial customers that make FDP a stock that could continue to deliver such significant shareholder returns over decades.

Indeed, with data analysis the name of the game for just about every industry these days, the company is already having great success finding clients such as utilities, defence companies, and highly-automated manufacturers. The firm’s marketing business has already proven the cross-industry potential of Kx as sales rose 39% last year to £30.7m, representing over 20% of group revenue.

With the core Kx software simply being tweaked to meet the needs of new clients, the company is also highly profitable with EBITDA margins of 18.9% last year. With its potential addressable market nearly limitless as it diversifies its client base, I believe investors could do very, very well by First Derivatives, despite its shares trading at a pricey 45 times forward earnings.

The post 2 growth stocks you could retire on appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any 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.

It operates in sales, marketing, distribution and other business services, plying its trade in the energy, technology and healthcare sectors. And all of its divisions have “recorded strong profit growth” in the year.

A bumper year

We saw operating profit up 21%, with adjusted earnings per share up 18%, driven by the firm’s energy division’s outstanding profit rise of 24%. Free cash flow is up by a massive 43%. The dividend was boosted by 15%, though the yield stands at only a modest 1.6%.

For me, DCC looks very attractive on the long-term growth front, with chief executive Tommy Breen predicting another year of profit rises ahead.

As well as organic growth, DCC is active on the acquisition front and is expanding globally, ambitiously snapping up Esso’s retail network in Norway and Shell’s LPG business in Hong Kong and Macau. These overshadow the disposal of its environmental division (for an enterprise value of £219m), and should help it focus on more profitable businesses.

Its recent track record is impressive, with earnings per share growing by 67% in just four years, and we have growth in excess of 10% per year forecast for this year and next.

As I write, the shares are down 3% at 7,135p. That gives us a P/E of a little under 20 on 2019 forecasts, which might put some people off. But for me that’s a fair valuation for a company with the growth potential that I’m seeing here. 

Heading for the cliff?

First Derivatives (LSE: FDP), a firm supplying IT services to the financial sector, also filed an impressive set of results on Tuesday.

Adjusted pre-tax profit came in 24% ahead with adjusted EPS up 19%, and the dividend was lifted by 18% (albeit for a yield of only 0.8%). Net debt looks modest at £13.5m.

With its software subscription model, First Derivatives has good visibility, and says the current year is off to “an encouraging start“, with chairman Seamus Keating saying “we anticipate another year of strong growth“. Its software does seem to be going places, with an increasing number of companies taking it up.

Sky-high shares

If you’re looking for a share price that has soared, look no further — First Derivatives shares are up more than 400% in the past five years, to 2,560p. But the problem for me is that earnings, while appreciating impressively, haven’t kept growing at the same rate. That’s led to a steadily ballooning P/E — forecasts put the shares on a multiple of 45 for the coming year, and that makes me more than a bit twitchy.

I’ve been following growth shares for years, and there’s a common pattern where great results keep rolling in, investors keep on buying the shares, and the price gets unsustainably ahead of rationality. What usually happens is that one set of results comes in perhaps a little below expectations, and the result is a panic sell-off. 

And I see a distinct possibility of that happening here. I’m convinced that First Derivatives is a solid growth company with a very attractive future. But for me, the current share price is just too high.

The post One growth share I’d buy today, and one I’d sell appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any 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.

Both look like decent businesses to me and both have some high profile backers. But in my view the downside risks are growing. I’m not sure now is the right time to take a gamble.

Financial whizz kid

Software group First Derivatives (LSE: FDP) announced this morning that full-year profits for the year ending 28 February should be “moderately ahead” of current market forecasts.

Given that consensus forecasts were downgraded in February, today’s news should be good for the stock. But First Derivatives’ share price hardly moved following today’s news.

What’s the story?

This company specialises in high-speed analysis of large volumes of data. Financial firms are the group’s main customers, but First Derivatives also operates in the technology and energy sectors and is targeting further expansion.

The shares have been strong performers and have risen by 470% over the last five years. However, sales and profits haven’t kept up. Sales for the year just ended are expected to have topped £144m. That’s only about 155% more than five years ago.

Operating profit has only risen by about 70% over the last four-and-a-half years. This has resulted in the operating margin falling steadily, from 17% in 2012 to just 9.3% last year.

A final concern is that regular issues of new shares mean diluted earnings per share have only risen by 31% to 36.7p since 2012/13.

The stock currently trades on a forecast P/E of 43, with a yield of just 0.8%. In my view, investors need to consider whether profit margins are likely to improve before investing. At the current price, this stock looks too expensive to me.

Storing up problems?

Revenue rose by 4.5% to £8.3m at self-storage firm Lok’n Store Group during the six months to 31 January. The group’s adjusted pre-tax profit was 13.5% higher, at £2.1m.

The company said that it saw a 4.6% increase in like-for-like unit occupancy, which rose to 61.8%. Pricing was up by 1.1% on a like-for-like basis.

Self-storage seems to be a growth business. Lok’n Store now has a total of 33 stores and expects to open four more during the current year. The group’s finances look healthy, with net debt of £16.7m and a loan-to-value ratio of just 14.4%.

Management says that one of its main goals for the year ahead is to improve occupancy and increase the cash generated by its storage units that can be distributed to shareholders as dividends.

However, I think investors need to consider Lok’n Store’s valuation. The stock currently trades at a 15% premium to its adjusted net asset value of 387p and offers a forecast dividend yield of just 2.1%.

Increased occupancy at current prices could fund rapid dividend growth. But any fall in occupancy or pricing could cause the firm’s profits to fall fast. Although Lok’n Store is committed to long-term mortgage and lease payments, the firm’s customers often only commit for a few weeks at a time. So the outlook could potentially change very quickly.

In my view, it looks fully priced at current levels. I’d rate the shares as a hold, at best.

The post Be wary of these top growth stocks after rising 50%+ appeared first on The Twelfth Magpie.

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Roland Head has no position in any 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.

One such example is the MFM Slater Growth Fund, which has been managed by Mark Slater since March 2005. Over this period, the fund has produced a return of nearly 300% while over the same period funds managed by Woodford have produced a return of around 200%.

Here are two of the top 10 positions.

In demand

First Derivatives (LSE: FDP) is not a company that features heavily on most investors’ radars. The company provides IT services to the financial services industry, a boring but essential line of business. Since the financial crisis, the demand for such services has been growing as regulators clamp down on bad behaviour and companies are forced to find new ways to meet regulatory demands while at the same time keeping costs low.

First Derivatives’ profits have surged over the past few years thanks to this trend. For the financial year ending 28 February 2013, the company reported revenue of £57m and a pre-tax profit of £6.2m. For the year ending 28 February 2017, analysts have pencilled-in a pre-tax profit of £18.1m on revenue of £144m, up 191% and 152% respectively over the five-year period. During this time, earnings per share have grown 86% and shareholders have been well rewarded as the shares are up 125% since the beginning of 2014. 

City analysts are expecting this growth to continue for the next few years. Earnings per share growth of 10% has been pencilled-in for the fiscal year ending 28 February 2018 and further earnings growth of 8% is expected for the following financial year. Between fiscal year-end 2017 and 2019 pre-tax profit is expected to increase by 23%.

This kind of growth is worth paying for and the market has placed a high multiple on the company’s shares as a result. Shares in First Derivatives currently trade at a forward P/E of 47.8 and only yield a paltry 0.7%, which may be too pricey for most investors. Still, if the company can repeat the growth seen in the past few years, over the long term this may be a price worth paying.

Cheap growth 

Like First Derivatives, CVS Group (LSE: CVSG) is another company that has achieved outstanding growth over the past few years, which appears to be why MFM’s managers like the company. 

Between fiscal year-end 30 June 2012 and 30 June 2017, the company is expected to have grown earnings per share by an impressive 167%. Over the same period, pre-tax profit is up by a staggering 771%. Once again, such growth does not come cheap. Shares in CVS are currently trading at a forward P/E ratio of 29.6, falling to 27.2 for 2018. 

Nonetheless, with earnings per share growth of 30% projected for the year ending 30 June 2017, the shares appear to be worth paying a premium for.

The post 2 growth stocks owned by this Neil Woodford-beating fund appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any 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.

For example, a £5,000 investment just 10 years ago, split across three up-and-coming companies ASOS (LSE: ASC), First Derivatives (LSE: FDP) and Telit Communications (LSE: TCM), would now be worth an incredible £113,500.

10 years ago these companies’ revenues were a fraction of what they are today and for those investors brave enough to invest at the time and hold on for the long haul, the results have been truly life changing. So what’s next for these three? Will the 10 years ahead bring similar returns?

Too expensive

Asos is an incredible success story and it’s not hard to see why the online retailer has performed so strongly over the last decade, with revenues growing from £20m in FY2006 to a huge £1,445m in FY2016, a stunning 10-year compounded annual growth rate (CAGR) of 54%.

While many city analysts believe that the share price can continue to climb from here, I have concerns that the stock is too expensive at current levels.

Revenue growth at the retailer is still strong, with average growth of 23% over the last three years, however Asos trades on an eye-watering P/E ratio of 79 and a price/earnings-to-growth (PEG) ratio of a high 3.3, suggesting to me that the stock is currently overvalued.

I’m a huge fan of Asos as an online retailer, but I don’t believe the stock offers good value at the current share price.

Strong momentum

Big data specialist First Derivatives is another that has performed exceptionally well for long-term shareholders with 10-year revenue CAGR of 34% propelling the share price from 160p in late 2006, to 2,100p today.

The tech firm recently reported excellent interim results with H1 revenue climbing 34%, adjusted diluted earnings per share increasing 21% and management stating that the company has a “strong pipeline of opportunities in multiple industry segments.”

First Derivatives currently trades on a forward looking P/E ratio of 36 times next year’s earnings, which isn’t cheap. But I believe the company is well placed to capitalise on the fast growing demand for big data services and thus still has considerable potential going forward.

Rise of the machines

When Japan’s SoftBank paid $32bn for ARM Holdings earlier this year, the internet giant made it clear that it was specifically looking to capture the “very significant opportunities provided by the Internet of Things.”

And one company poised to benefit from the Internet of Things (IoT) revolution is Telit Communications.

Despite revenue growth at Telit picking up significantly over the last five years, the stock trades on a P/E ratio of just 12.2 times last year’s earnings, which seems quite low in my opinion.

H1 2016 results were no doubt disappointing with earnings falling 15% on the back of unexpected delays in US certification requirements for its new LTE Cat-1 product line. However the certifications for these products are now in hand, and Telit is confident of a strong second half of 2016, recently advising the market that earnings for the year will be between 26 and 30 cents per share.

With a 30% share of the IoT market, Telit is at the forefront of an industry set to see tremendous growth in the next few years and as a result I believe there’s plenty of growth to come from this tech minnow. 

The post 3 stocks that turned £5,000 into £113,300 appeared first on The Twelfth Magpie.

More reading

• 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?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Edward Sheldon owns shares in First Derivatives and Telit Communications. The Motley Fool UK owns shares of and has recommended ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.