But to put that move in perspective, the stock has been a big success, and even today’s price around 1,200p is more than 160% higher than it was six years ago. That long move was driven by annual rises in revenue and earnings.

Headwinds

Today’s statement starts with the headline: “Continued growth despite microelectronic headwinds.” In the first four months of the firm’s trading year, it saw a downturn in demand for critical components used in industrial lasers for microelectronic manufacturing, “particularly from China.” The news chimes with other recent reports about slowing economic activity in China, so perhaps we shouldn’t be surprised.

In the last full trading year to September 2018, around 23% of revenue came from the Asia Pacific region and countries other than the UK, US and those in Europe. So revenue from China falls in that classification, which puts the slowdown in context a bit. But, of course, the decline could gather pace to affect trading in other regions more over time.

To balance the negative news, the company said in the report that demand for fibre optic products and high-reliability fibre couplers used in undersea cable networks has strengthened “still further.”  The company reckons that high-reliability fibre couplers “are about to experience a multi-year growth phase.” That’s why the company is investing in further capacity to take advantage of its “market leading” position in the industry. The directors think the benefits of the first phase of such growth will arrive in the second half of the firm’s trading year to September 2019. So we are getting negatives and positives in the same statement.

Cyclicality biting

To add a bit of colour, GHH owned up to having “long been aware” of the risks regarding the inherent cyclicality of the microelectronics sector. It also pointed a finger at the impact of US/ China tariffs. Although demand in the area of microelectronics was up against strong comparatives from trading last year, uncertainty in the Chinese market means stocks will take longer to shift than the directors thought.

The bottom line is the firm expects percentage growth in low single digits overall for the full year to September 2019. So that’s not a disaster and growth is still growth. Indeed, the order book is almost 2% higher than a year ago at £91.4m. However, I think the news today reveals the company’s Achilles heel, which is its vulnerability to economic cycles in the sectors in which it operates.

Meanwhile, the forward-looking price-to-earnings ratio stands close to 19 for the trading year to September, and the anticipated dividend yield is about 1%. City analysts following the firm expect earnings to cover the payment more than five times, though, and I reckon high cover like that suggests the directors see plenty of opportunities ahead to invest in growth rather than pay out all the company’s spare cash with the dividend. If I had been holding the shares for a long time, I’d continue to hold, but to enter a position now, I’d demand more of a discount in the valuation. But Gooch & Housego is firmly on my watch list.

The post Is Gooch & Housego a falling knife worth catching, down 20% today? appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Gooch & Housego. 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 this could present a buying opportunity. The company’s long-term investment prospects seem to be sound, with a relatively low valuation suggesting that it may offer a wide margin of safety. As such, it could offer upside potential at a time when a number of shares appear to be overvalued. An example of such a share is an AIM-listed company that released a trading update on Thursday.

High valuation

The company in question is manufacturer of optical components and systems, Gooch & Housego (LSE: GHH). Its full-year trading update showed that performance in the year to 30 September 2018 has been in line with expectations. It has benefitted from positive market conditions in the industrial sector. Demand for critical components used in microelectronic manufacturing has been high, while sales of high reliability fibre couplers for undersea cables have also helped to boost its overall performance.

The business has a record order book which stands at £96.1m. This is an increase of 33% compared to the same period of the previous year. It has a strong financial position which should allow it to continue to invest for the long term as it seeks to execute its strategy.

However, with the Gooch & Housego share price having risen by 26% in the last year, it now appears to lack a margin of safety. Despite being forecast to post a rise in earnings of 15% in the current year, a price-to-earnings growth (PEG) ratio of 2 suggests that it may be a stock to avoid at the present time.

Improving outlook

As mentioned, the financial performance of IQE has been somewhat disappointing in recent months. The company has reported lower profitability as it seeks to invest for long-term growth. As a result, its bottom line is expected to fall by around 1% this year. This puts it on a forward price-to-earnings (P/E) ratio of around 28 for the current financial year.

However, next year the performance of the business is due to improve significantly. It is expected to post a rise in earnings of 43%, which puts it on a price-to-earnings growth (PEG) ratio of 0.7. This suggests that it offers a wide margin of safety that could mean there is recovery potential over the coming years.

IQE’s recent update may have shown a fall in profitability, but the company was hit by negative currency adjustments. It continues to invest in its production facilities, while demand within its operating segments remains high. As such, from a long-term investment perspective, it seems to have significant appeal. Certainly, volatility could continue to be high, and there may be further disappointment ahead in the near term. But in the long run, a turnaround could be on the cards.

The post Why IQE’s share price could be set for a rebound 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?

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Gooch & Housego. 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.

A robust order book

The upbeat message is one you’ll have become used to over the past few years if you hold the shares. The stock has risen 2,800% or so in nine years, from around 43p in spring 2009 to 1,295p today, driven by generally rising revenue and earnings and a change in investor sentiment since the post-credit-crunch lows of the previous decade. Remember all those ‘millionaire-maker stock’ headlines? Well, it really can happen if you pick the right stocks, and in a relatively short period of time too.

Looking forward, the directors expect a higher second-half weighting to trading and say the firm is experiencing positive overall market conditions with “exceptional” demand for critical components used in microelectronic manufacturing. However, there’s been a dip in demand for high-reliability couplers since the beginning of the year, but the directors think that market will recover in the second half. Meanwhile, the order book is higher than it has ever been at around £85m, some 36% above the figure a year ago at constant currency prices.

More to come?

After such a successful multi-year run, you could be forgiven for thinking it could be all over soon and we’ve missed the investing boat. But the firm is positioning itself for growth and created three technical divisions in a drive to become a “more scalable” organisation that can “accommodate the anticipated growth rates.”  Chief executive Mark Webster said: “G&H remains committed to our strategy of diversification and moving up the value chain.”

Many believe British manufacturing could be set for a long period in the economic sun. If that proves to be the case, I think Gooch & Housego is a good place to start your research. The forward price-to-earnings (P/E) ratio runs close to 22 for the trading year to September 2019, which isn’t cheap, but I see the valuation as a mark of quality in this case.

Turning around

Meanwhile, sector peer Morgan Advanced Materials (LSE: MGAM) is around three times the size of Gooch and Housego with a market capitalisation near £924m. The firm presents us with something of a turnaround proposition and trades at a lower valuation. The recent share price of 321p throws up a forward P/E rating of just over 12 for 2019 and there’s a forward dividend yield running at 3.6%.

After several years of gently shrinking earnings, the firm’s full-year results in February saw a “return to organic growth” during the year, which City analysts predict will continue with earnings advances of 9% during 2018 and 6% in 2019.

The recovery plan includes restructuring, simplification, focus, research & development, staff training and a sales drive – the meat and veg of any serious turnaround. It is a sign that the directors are aiming to carve a lean, modern business from the fat of the old, which has Victorian origins stretching back around 160 years. I think the stock is interesting right now.

The post 2 solid firms that could be among the best stocks to buy now 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 has no position in any of the shares mentioned. The Motley Fool UK has recommended Gooch & Housego and Morgan Advanced Materials. 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 business, a giant in the manufacture of industrial threads, was last dealing 11% higher on the day and within a whisker of January’s record tops of 90p per share. Coats’ market value has grown 60% in the past 12 months alone and there is plenty of scope for it to continue swelling.

Today the FTSE 250 giant announced that, with revenues having risen 4% in 2017, to $1.51bn, adjusted operating profit had risen 10% to $174m.

While troubles remain over at Crafts — sales here slipped 10% last year — revenues at Coats’ core Industrial division (responsible for almost nine-tenths of group sales) continue to click through the gears. It noted that here, market share grabs supported sales at its Apparel & Footwear sub-division, while bolt-on acquisitions boosted sales at its Performance Materials operations. Thus total Industrial sales rose 6% year-on-year.

The bright result encouraged it to hike the dividend 15% to 1.44 US cents per share.

More to come?

Last year’s estimate-beating numbers were not the only cause for celebration, though, as the company upgraded its profits outlook for 2018.

Indeed, chief executive Rajiv Sharma advised that “adjusted operating profits are expected to be slightly ahead of previous management expectations,” the main man citing the impact of Coats’ so-called Connecting for Growth transformation programme as well as the contribution of US-based Patrick Yarn Mill, which it acquired in December.

And brilliant cash generation provides the firepower for it to keep organic investment and M&A action on the front burner. Last year adjusted free cash flow bumped 12% higher to $87m.

Underlining the manufacturer’s rosy profits prospects, City analysts are expecting earnings to rise 7% and 9% in 2018 and 2019 respectively, figures I reckon could be subject to chunky upgrades in the months ahead given exceptional sales momentum.

So while a forward P/E ratio of 16.9 times may sit outside widely-regarded value territory of 15 times or below, I reckon the threads play is a compelling growth share to consider today.

Business is booming

Investors searching for little-known growth gems may also want to check out Gooch & Housego (LSE: GHH) right now.

The photonics specialist is expected to chalk up earnings expansion of 14% in the year to September, and a 6% advance is forecast for fiscal 2019. This leaves the business trading on a pretty toppy prospective P/E ratio of 24.9 times.

However, ripping demand for the AIM company’s wares means that this expensive rating can be forgiven. Just this week Gooch & Housego announced that “we are experiencing exceptional demand for critical components used in microelectronic manufacturing,” a scenario which has driven its order book to record levels (to £89.7m as of the end of January, up 48.4% year-on-year).

Like Coats, Gooch & Housego has also seen its share price gallop over the past year, up 15% in the period. I fully expect it to continue flying as the firm upgrades capacity to meet rampant demand.

The post 2 secret growth stocks to watch in 2018 and beyond 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 recommended Gooch & Housego. 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.

Of course, there are a number of large-cap stocks that offer upbeat income growth prospects. However, some smaller companies could also be of interest to income-seeking investors. Here are two prime examples.

Solid growth

Reporting on Wednesday was manufacturer of photonic components and systems Gooch & Housego (LSE: GHH). The company has been performing in line with management expectations and has benefitted from positive overall market conditions in the first four months of the financial year.

There has been exceptional demand for critical components used in microelectronic manufacturing. And while there has been a slowing in demand for high reliability couplers since the start of the year, this is expected to come back in the second half of the year.

With an order book that has reached record levels, the outlook for the stock remains positive. In fact, it is forecast to post a rise in earnings of 11% in the current year. This follows a strong trend of growth in previous years, with the company generating an annualised bottom-line growth rate of 12% during the last five years.

In terms of its dividend prospects, Gooch & Housego’s coverage ratio of 4.9 suggests that it could afford to pay out a significantly higher proportion of profit as a dividend. This could help to lift its yield of 0.8% to substantially higher levels. And with the company having a reliable track record of growth, its shares could continue to rise following their 23% growth in the last year.

Uncertain prospects

One smaller company which has endured a difficult recent period is beverages company Nichols (LSE: NICL). The producer of Vimto has experienced supply issues in the Middle East that have caused its operational and financial performance to come under pressure versus expectations. As such, the stock is forecast to post a rather lowly 4% rise in earnings in each of the next two financial years. This is considerably lower than the double-digit growth which has been delivered in recent years.

With the Nichols share price having fallen 6% in the last three months, there could be a wider margin of safety on offer than is normally the case. The business continues to have a bright long-term future, although its near-term performance could be relatively volatile.

With its dividend being covered 2.1 times by profit, the company appears to have significant scope to raise payouts to its shareholders over the long run. While it may only yield 2.2% at the present time and lacks the stability of previous years, the total returns on offer may be exceptionally high.

The post 2 small-cap dividend-growth stocks I’d buy with £2,000 today 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?

Peter Stephens owns shares in Nichols. The Motley Fool UK has recommended Gooch & Housego and Nichols. 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.