I’m looking for profitable mid-cap companies that still have room to grow. I don’t want businesses selling products that could fall out of fashion, or become redundant.

To satisfy these requirements, I’ve focused my attention on companies that provide the hardware and software infrastructure needed to run the internet.

Cyber security growth

The first company on my radar is “cyber security and risk mitigation” specialist NCC Group (LSE: NCC). This business provides the services and software needed to keep customer information safe, protect corporate networks from cyber attacks, and manage software development securely.

NCC went through a difficult patch in 2016 and 2017, but it now seems to be making good progress. Revenue from continuing operations rose by 8.3% to £233.2m last year, during which adjusted operating profit climbed 22% to £31m.

Adjusted figures can sometimes present an optimistic view of events. But in NCC’s case, last year’s numbers were backed up by free cash flow of £26m. This comfortably covered the dividend and allowed the group to substantially reduce its borrowing levels.

In a statement today, NCC chief executive Adam Palser said the firm was on track with its profit guidance for the current year. Analysts’ forecasts indicate that this should see the group’s adjusted earnings rise by about 10% to 9.2p per share. This puts the stock on a forecast P/E of 22, with a dividend yield of 2.4%.

I think the shares will soon grow into this valuation. Rising profit margins and strong cash generation tick my boxes, and I’m attracted to the fast-growing cyber security market. I rate NCC as a buy.

My top IT pick

My favourite company in this sector is Computacenter (LSE: CCC). This FTSE 250 IT infrastructure firm has delivered consistent growth and market-beating shareholder returns in recent years.

This firm’s shares have risen by 128% over the last five years, versus a 16% increase for the FTSE 100.

However, since hitting a 52-week high of 1,632p in July, Computacenter’s share price has gone into reverse. The stock is now worth 20% less than it was two months ago. Why?

In July, the group upgraded its profit guidance for the current year. And in August, half-year results confirmed this revised guidance, and revealed a 24% increase in half-year adjusted pre-tax profit.

What may have caused the shares to fall is the warning from chief executive Mike Norris that growth during the second half of the year may be slower, relative to 2017. Another potential concern was Norris’s comment that “it is impossible to predict how long these buoyant market conditions will continue.”

Don’t under-estimate this company

Norris is right to point out that rapid growth in demand for cyber security, network capacity, and cloud computing facilities, has driven strong growth for his firm.

However, I don’t see the risk of a slowdown as a reason to avoid this stock. Computacenter generated a return on capital employed (ROCE) of 26% last year and returned £100m of surplus capital to shareholders. These are impressive figures.

The firm appears to be on track to deliver continued growth this year. In my view, this performance comfortably justifies the stock’s forecast P/E of 18 and 2.3% yield. I’d be a buyer at this level.

The post 2 tech growth stocks I’d buy and hold for the next 20 years appeared first on The Twelfth Magpie.

More reading

• Around £41 now, here’s where this undervalued newly-promoted FTSE 250 tech provider ‘should’ be trading today
• How to invest £288 a month in UK shares to target a £4,974 passive income for life
• £3,750 invested in the FTSE 250 at the start of 2026 is now worth…

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of NCC. 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 question is, with earnings exploding, is now the time to buy this high-tech growth play? 

Time running out? 

After a strong start to 2018, Kainos now expects its numbers for the year ending 31 March 2019 to be “ahead of current market expectations.” As City analysts had been expecting the company to report earnings per share (EPS) growth for 2018 of a staggering 31% before the release, it’s not surprising the market has reacted positively to the update confirming that the business will beat City expectations.

Kainos provides tailored digital solutions to the public and private sector to help enterprises better manage their operations. It has some big-name clients, including the UK Home Office, Primark and Diageo. One of its primary offerings is services related to the Workday human resources management platform. Here Kainos aims to use its digital experience to produce bespoke human resource management solutions for customers. 

All of the above indicates to me that Kainos has an extremely defensive business model. Producing tailored software systems for clients virtually guarantees the client will remain with the business, locking in potentially many years of recurring revenue for the firm. Using this approach, the company has been able to grow revenue at a compound annual rate of 26% since 2013. Net profit has expanded at a compound annual rate of 27%.

I reckon this is just the start of its growth story. With revenues of £113m predicted for 2019, Kainos is still small-fry in the global tech business. There is a multi-billion pound market out there for the group to capture. 

With this being the case, even with the stock trading higher by 12% at the time of writing, I think the shares could increase significantly in value over the next five to 10 years. The company has tremendous blue-sky potential. 

Security growth 

NCC (LSE: NCC) is another IT sector growth stock I believe could produce huge returns for shareholders. NCC operates in one of the hottest sections of the tech market today, cybersecurity. 

Hackers and criminal gangs looking to take advantage of weaknesses in computer systems are getting smarter every day, and it is a race for companies such as NCC to stay ahead. Analysts estimate the size of the global cybersecurity market could hit $230bn by 2022, up from $75bn in 2015. It is unlikely to stop there. The market will likely continue growing exponentially as tech continues to dominate our everyday lives. 

With revenues of just £255m predicted for 2019, NCC is another a small fish in a massive pond. Fiscal 2017 and 2018 were mixed years for the company. Revenue continued to grow, but the firm was forced to report a loss and commissioned a strategic review as it tried to run before it could walk. 

Analysts are expecting a full recovery in 2018 with EPS growth of 151% targeted. Further, EPS growth of 15% is slated for 2020. Based on these estimates the stock is changing hands at 23 times forward earnings. Despite the firm’s troubles last year, I believe this multiple is justifiable considering the size of NCC’s potential market.

The post This high-tech growth play could have millionaire-making potential appeared first on The Twelfth Magpie.

More reading

• How much do you need to invest to build a £100,000 Stock and Shares ISA?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of NCC. The Motley Fool UK has recommended Diageo. 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 proved to be the case. Twelve months later, the shares are up almost 9% in value. The other company — Carillion — no longer exists.

In retrospect, it was never a fair contest. Nevertheless, today’s update from the mid-cap — and the renewed interest in owning its stock — is yet another demonstration of why it can sometimes be a good idea to back companies experiencing significant (but temporary) difficulties. Let’s look at those numbers in more detail.

“Successfully stabilised”

Group revenue from continuing operations rose by 8.3% to £233.2m in the year to the end of May. Perhaps more significantly, the company bounced back into profit by the end of the reporting period, registering a gain of £11.9m compared to the £44.8m loss sustained in 2017.  

More good news included a 36% reduction in net debt (to £27.8m). Assuming this continues to fall, it’s likely that dividends — which were maintained at 4.65p per share for the year — will climb higher in time, thus rewarding loyal holders who stuck with the company when its share price fell through the floor in October 2016 and again in February last year.

Following significant changes to management, an organisational restructure and the sale of non-core units of the business (Web Performance and Software Testing), Chairman Chris Stone reflected that the company has been “successfully stabilised“, adding that expectations for adjusted earnings before interest and tax (EBIT) in 2019 “remain unchanged“.

Taking into account the progress that’s been made and the fact that NCC’s markets “remain buoyant“, it’s perhaps unsurprising that this morning’s figures have encouraged investors to reassess the company, resulting in a 10% rise to its share price.

Whether a valuation of 28 times forecast earnings before today represents good value for a company trying to rebuild itself is questionable, but in a world where the demand for cybersecurity services is only likely to grow, at least some investors appear willing to pay up.

Increased demand

Of course, not everyone wants to buy into a recovery story. One company that’s already doing rather well is international professional services provider FDM Group (LSE: FDM).

Although news flow has been pretty quiet over the last few months, April’s pre-AGM update suggested the business looks like meeting its full-year targets. First quarter revenue from its IT consultants (Mounties) was 17% higher in constant currency compared to 2017 with 3,310 stationed at client sites at the time of the announcement (compared to 2,826 the year before). 

Changing hands for almost 29 times earnings, FDM will be of absolutely no interest to value hunters. Indeed, having more than doubled in price in just two years, a lot of growth-focused investors may regard this valuation as rather frothy.

Since trying to guess the short-term trajectory of any company’s share price is arguably a waste of time, it’s probably better to dwell on those things we do know. These include the consistent (mostly double-digit) rises in earnings, huge returns on capital employed, no debt, a near-3% dividend yield and increased demand for its services from businesses needing to be GPDR-compliant.

Based on these qualities, FDM was never going to be cheap. Just be sure you’ve got a head for heights if you’re considering adding it to your portfolio.

The post This battered growth stock is up 10% today. Is the recovery on? appeared first on The Twelfth Magpie.

More reading

• 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• 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 owns shares of NCC. 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.

Cybersecurity specialist

Cybercrime is a huge problem for businesses and governments today. Indeed, according to IBM CEO Ginni Rometty, it’s the “greatest threat” to every company in the world right now. Looking at the stats, I tend to agree. In 2016, cybercrime cost UK businesses alone around £30bn.

That’s why I believe investors should look at cybersecurity specialist NCC Group (LSE: NCC). Headquartered in Manchester, the £600m market cap company specialises in protecting businesses against the ever-evolving threat landscape. It currently serves over 15,000 clients across the world.

The group experienced ‘growing pains’ in 2016. It made a series of acquisitions between 2013 and 2016 before realising that it had grown too quickly. Back-to-back profit warnings saw the stock fall from 350p to 110p.

However, the business now looks to have stabilised, with Chairman Chris Stone stating this morning that it has “delivered a significant recovery from the low point of the second half of the prior year.” Indeed, half-year results released today look robust. Although operating profit fell 10.8%, revenue climbed 7.2%, operating cash flow increased 20.5% and the dividend was maintained at 1.5p. Mr Stone also commented: “Strong organic revenue growth in our core assurance businesses continues to drive positive momentum in the business.”

Looking ahead, I believe NCC has bright prospects. For FY2019, analysts have pencilled in earnings growth of 15%. The shares don’t trade cheaply, on a forward P/E ratio of 28, yet if NCC can continue to build on its momentum, I think there’s potential for further gains.

A cheap UK bank stock

Moving across to the banking sector, I also like the look of challenger business OneSavings Bank (LSE: OSB) right now. Shares in the £990m market cap lender look too cheap, to my mind.

The bank has enjoyed strong growth in recent years, with net profit surging from £27m to £121m between 2013 and 2016. A trading update in November revealed further progress, with loan book growth of 17% for the nine months to 30 September.

Yet the stock’s valuation simply does not reflect this momentum. With analysts forecasting earnings per share of 48.3p for the year just passed, the estimated P/E ratio is just 8.3.

What also appeals to me here is the potential for big dividends. The bank is growing its payout at an astonishing rate. Last year, the dividend was hiked by 21%. For FY2017 and FY2018,  analysts expect growth of 20% and 27% respectively. The expected payout of 15.9p per share for FY2018 equates to a yield of a healthy 3.9% at the current share price with strong coverage of over three times as well.

When you consider that rival Aldermore was recently acquired at a P/E of around 10, OneSavings’ current valuation looks compelling, given the bank’s momentum. The stock is a ‘buy’, in my opinion.

The post 2 growth stocks I’d buy before it’s too late appeared first on The Twelfth Magpie.

More reading

• Here’s how much someone would need in a Stocks and Shares ISA to make £740 a month
• 6.8% yields! 2 UK shares to consider for a Stocks and Shares ISA?

Edward Sheldon owns shares in NCC Group. The Motley Fool UK owns shares of NCC. 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, global cybersecurity and risk mitigation expert NCC (LSE: NCC) seems to have missed this opportunity.

Growing pains

As demand for cybersecurity expertise has spiked, NCC has seen the value of its shares fall by 40% year-to-date following two profit warnings. 

To try and stem the bleeding, management commissioned a strategic review, and it looks as if these actions are starting to pay off. Indeed, today the company published a trading update covering the three-month period from 1 June to 31 August ahead of its Annual General Meeting showing a 5.6% increase in continuing revenue to £62.7m. Management also reports that “implementation of the Strategic Plan is gathering momentum with a number of new initiatives underway.” The disposal of several non-core businesses is also progressing well. 

NCC is trying to turn itself around in the perfect environment. The size of its end market is multiplying, providing a tailwind to group growth. And I believe that this tailwind, coupled with management’s actions to restructure NCC’s offering, should lead to returns for investors in the months and years ahead. 

City analysts are already projecting a recovery next year with earnings per share growth of 13% pencilled in for the fiscal year ending 31 May 2018, followed by growth of 16% for the following year — a dramatic turnaround from last year’s decline of 43%. 

NCC isn’t the only turnaround story I believe it’s worth keeping an eye on. Cable solutions supplier Volex‘s (LSE: VLX) turnaround is also starting to gain traction after years of drastic cost-cutting and restructuring by management.

Beginning to pay off 

Volex’s problems began in 2012 when the company lost its primary customer and sales slumped. After hitting a high of 375p at the beginning of 2011, shares in the enterprise crashed to a low of 27.5p during 2016 as losses hit $8.5m. 

However, this year the firm’s fortunes have started to improve. For the year ended April 2, restructuring and cost-saving measures increased underlying operating profit, which strips out exceptional costs, by 26.6% to $9.1m, while underlying pre-tax profit grew 35% to $7.2m. Meanwhile, net cash rose to $11.3m from net debt of $3.2m in the year-ago period due to a focus on cash generation.

During the year, Volex secured purchase orders from four new customers, two in the online technology space, one from an electric car manufacturer, and the last one from a US engineering firm. So the company’s turnaround finally appears to be yielding results, and it seems customers are still interested in its offering. 

According to City analysts, earnings per share will fall around 11% for the year ending April 2018, as it seems the group will have to book further exceptional costs. Still, for 2019, lower one-off costs and a return to growth is expected with earnings per share of 6.3p projected. 

The post Two top turnaround stocks that could make you rich appeared first on The Twelfth Magpie.

More reading

• 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• 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?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of NCC. 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.

Interim update

Reporting on Wednesday was software and IT services business Sanderson Group (LSE: SND). It delivered a rise in revenue of over 10% versus the same period of last year, with pre-contracted recurring revenues up to £5.4m from £5.2m in the first half of last year. They now account for around half of total revenue and show that the focus on fostering long-term customer relationships is bearing fruit.

Operating profit was 5% higher, while net cash at the period end was up to £4.5m from £3.4m at the same point last year. The company raised dividends by 10%. While this was ahead of profit growth, Sanderson Group still has a dividend coverage ratio of 2.1. This suggests that dividends could increase at a faster pace than earnings without putting the company’s financial position under pressure over the medium term.

Looking ahead to next year, Sanderson Group is expected to record a rise in its bottom line of 6%. This could help to boost dividends yet further, and they are expected to increase by over 10% next year. While this puts the company on a modest forward dividend yield of 3.5%, more dividend growth could make Sanderson a relatively attractive income share for the long run.

Growth potential

Also offering upbeat growth potential is escrow and assurance service provider NCC (LSE: NCC). Its dividend yield of 2.8% is also below that of the FTSE 100, but the company is expected to deliver improving earnings growth over the next two years. This could act as a positive catalyst on shareholder payouts.

For example, NCC is forecast to record a rise in earnings of 16% per annum over the next two years. Given that it has a dividend coverage ratio of 1.6, this could lead to a fast-paced dividend growth outlook. In fact, shareholder payouts are expected to rise at an annualised rate of 8.6% over the course of the next two years. This rate of growth is likely to be above and beyond the rate of inflation, which could make NCC a more popular income share.

As well as its income prospects, NCC also offers clear upside potential. It has a price-to-earnings (P/E) ratio of 23, which, when combined with its growth outlook, translates into a price-to-earnings growth (PEG) ratio of just 1.4. Given the company’s track record of growth and the sound business model which it has adopted, now could be the right time to buy it for the long term.

The post These promising dividend growth stocks could help you retire early appeared first on The Twelfth Magpie.

More reading

• 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• 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?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of NCC. 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.