With this being the case, I believe the best strategy is to combine both income and growth stocks in your portfolio, to get the best of both worlds.

FTSE 100 income champion 3i Group (LSE: III) and Redcentric (LSE: RCN) could be perfect picks for this strategy.

Small-cap profits 

3i is an investment business, specialising in private equity. Over the years, the company has achieved outstanding returns for investors with the shares gaining 184%, excluding dividends, since 2013. Over the same period, the FTSE 100 has produced a total return of only 17%, once again excluding dividends.

And when it comes to dividends, 3i stands out. Over the past five years, the firm has increased its per share distribution from 8.1p to 26.5p, a compound annual growth rate of 26.8%. At the time of writing, the shares support the dividend yield of 3.2%.

As my Foolish colleague Kevin Godbold recently pointed out, one of 3i’s most attractive qualities is its exposure to small businesses. The company invests in smaller firms, which it identifies as having significant potential. Management helps these firms access capital and new markets and when the business has matured, it sells out, hopefully with a substantial profit.

This approach enables investors to profit from the growth of smaller companies without having to take on the additional risk that usually comes with investing in this space. 

3i is also able to invest in countries and businesses that the average investor would be unable to access. For example, at the end of March, the company sold its stake in ferry operator Scandlines, which operates ferry routes between Germany and Denmark, booking a total profit of €347m. 

Better than expected

As 3i continues with its process of buying, building and selling, I believe shareholders should continue to reap the benefits. To complement 3i’s income, Redcentric could give your portfolio the growth boost it needs. 

After several years of disruption, the IT services business is expected to return to growth this year. City analysts have pencilled in normalised earnings per share growth of 536% to 5.1p (from 0.8p), and an increase of 17% is expected for 2019.

According to a trading statement issued by the business today, the company is well on the way to hitting these targets. Meanwhile, debt reduction is running ahead of plan. Management reports that net debt at the end of March was £27.7m, “better than the board’s expectations.“

While a consequent forward P/E ratio of 15.6 times may not be compelling on paper, I reckon the prospect of additional electrifying earnings growth in the year ahead makes the business exceptional value at current prices. Especially considering the fact that 87% of the company’s revenue is recurring in nature.

The post One growth stock and one FTSE 100 dividend stock you could buy with £2,000 today appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

And latest production data from the Energy Information Administration this week has done little to soothe my concerns. These showed production in the US hit 9.95m barrels per day in September, the highest level since July 2015. Exports of 1.98m barrels per day was the highest total on record.

Rig count numbers from Baker Hughes suggest that these levels could well keep on climbing too. The information gatherer announced that the number of oil rigs operating Stateside rose by six in the last reporting week, to 750, underlining how comfortable shale producers still are in operating at current price levels.

In the meantime, OPEC and Russia continue beavering away to address the glut, and so far talk is positive that the group’s current supply agreement could be extended into 2018 at next month’s meeting. But the oil cartel is clearly no longer the only game in town, and this threatens to keep crude prices depressed.

Risky business

So what does this mean for Tullow Oil? Well, plenty, as one would naturally expect. Indeed, the FTSE 250 driller suffered impairments to the tune of $642m between January and July, resulting in a pre-tax operating loss of $300m, as it chopped down its own price forecasts.

Of course, the prospect of energy prices also looms large over the company’s ability to pay down its colossal debt pile, which rang in at $3.8bn as of June, even if Tullow Oil continues to scale back capital expenditure and embark on further cost-cutting.

And although production has started gushing from Tullow Oil’s TEN project off the coast of Ghana, brokers are continuing to slash their profits forecasts for the business. It is now expected to endure another full-year loss in 2017, of 0.7 US cents per share, while anticipated earnings of 12.5 for 2018 are also down from prior estimates.

Bet on red

While I reckon those investing in Tullow Oil may be playing with fire, I cannot say the same for those currently splashing the cash on Redcentric (LSE: RCN).

Trading at the IT services provider has been pretty difficult over the past year, but it continues to boast a healthy sales pipeline for both new and existing customers. And in a reassuring update on Thursday it announced trading during the six months to September remains in line with expectations. Meanwhile, the appointment of telecoms exec Chris Jagusz as chief executive today places the North Yorkshire business in pretty safe hands, in my opinion.

And earnings forecasts are certainly a lot sunnier over at Redcentric than at Tullow Oil. The number crunchers expect the bottom line to swell 10% in the year to March 2018, and by a further 17% in fiscal 2019.

While a consequent forward P/E ratio of 16.6 times may not be compelling on paper, I reckon the prospect of additional electrifying earnings growth in the year ahead makes the business exceptional value at current prices.

The post A hot growth stock I’d always buy over Tullow Oil plc appeared first on The Twelfth Magpie.

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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.

Growth potential

Reporting on Wednesday was software and services company Gresham Technologies (LSE: GHT). It announced a rise in revenue of 26% compared to the first half of the previous year. Within this figure, total Clareti revenue is 52% higher. This includes the contribution from recently acquired C24 Technologies. Clareti software revenues were up 136% versus the same period of the prior year, which means adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) will be strongly ahead of the prior year.

During the first half of the year, the company signed eight new CTC clients across a wide range of industry segments and geographies. This should help to improve the diversity of the business, thereby reducing its overall risk profile. Given that the company continues to trade in line with previous guidance, its outlook remains relatively upbeat.

Looking ahead, Gresham Technologies is forecast to increase its earnings by 27% in the current year. This growth rate is around four times that of the wider index, and suggests that investor sentiment may improve as the year goes by. With a price-to-earnings growth (PEG) ratio of just 1, the company appears to be undervalued given its outlook. As such, now could prove to be a buying opportunity.

A return to profitability

Also offering investment potential within the IT sector is Redcentric (LSE: RCN). The supplier of IT managed services has posted two consecutive years of pre-tax losses, but is now expected to return to profitability in the current year. This has the potential to provide a boost to market sentiment, which could push the company’s share price higher after its decline of 51% in the last year.

Looking ahead to next year, the company is forecast to report a rise in its bottom line of 17%. This puts its shares on a PEG ratio of 0.8, which indicates there is upside potential. Certainly, there is scope for a downgrade to its forecasts as it transitions from loss to profit, but with a relatively wide margin of safety it could prove to be a sound long-term buy.

Furthermore, Redcentric is expected to recommence dividend payments next year. Although the company has a forward yield of just 0.6%, dividends are due to be covered almost 10 times by profit. This suggests they could rise rapidly, while the payment of a dividend also suggests the company’s management has confidence in its long-term outlook.

The post 2 cheap growth stocks I’d buy in July appeared first on The Twelfth Magpie.

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• Is there any value left in Lloyds shares now they’re over £1?
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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Peter Stephens 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.

The Purp

The big question as ever is whether newcomers have left it too late to invest, and whether old hands should take their profits. Purplebricks published its final results for the year ended 30 April 2017 and the initial response has been cool, with the share price dipping 1.32% at time of writing.

Success breeds high expectations, which can become hard to fulfil. If most companies posted a 151% rise in group revenue to £46.7m from £18.6m in the full-year 2016, as Purplebricks has just done, investors would have gone crazy. Clearly, they expected more. Other figures would also have dazzled under normal circumstances, such as a 132% rise in UK revenue to £43.2m and a first full-year operating profit and adjusted EBITDA of £1.7m, turning round last year’s £9.7m loss.

Ton of bricks

Average income per UK instruction for the UK climbed 14.8% to £1,035 while Purplebricks sold and completed on over £5.8bn of UK property transactions, with a further £3.69bn in the pipeline. Its online market share jumped from 62% to 72% and the balance sheet is strong with net cash at £71.3m.

Group chief executive Michael Bruce said its Australian operations are following a similar growth trajectory, and it launches its US assault in California in the second half of the calendar year. The group also has UK revenue expectations for 2018 at some £80m, nearly double 2017. City forecasters reckons that could near £130m in 2019.

That would put the company on a forecast price/earnings ratio of 156 times, which is 10 times what is normally seen as fair value. However, there is nothing normal about PurpleBricks and here’s an example: while writing this, the early-morning reversal has turned into a gain of 3.88%. The market clearly believes the purple patch can continue. Now it just needs to crack the US.

Red terror

Technology services provider Redcentric (LSE: RCN) is in a very different position. Its share price plunged 62% last November when it fired its chief financial officer after discovering multi-year accounting misstatements that will cost a minimum of £10m to rectify, and has flatlined ever since.

Today’s preliminary announcement for the year to 31 March 2017 reports the company trading in line with revised expectations after a challenging year, with its finance function and processes materially strengthened. The company also hailed strong sales and recurring business performance, with a good sales pipeline. 

The colour purple

Revenues totalled £104.6m, of which £90.2m is recurring revenue, with adjusted EBITDA of £17.3m and adjusted EBITDA margins of 16.5%. It suffered a £3m operating loss from operations, with a statutory earnings per share loss of 1.6p, reducing EPS to 4.45p. Net debt is £39.5m. It also said that customers and banks remain supportive, while it is cooperating with the Financial Conduct Authority operation.

The recent meltdown has no doubt coloured investor views with the stock down 1.91% so far. Why bet on Red when you can put your money on Purple?

The post The Purplebricks Group plc growth surge looks unstoppable appeared first on The Twelfth Magpie.

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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Harvey Jones 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.

According to data from TD Direct Investing, investors clearly saw the plunge in the value of Redcentric’s shares as an opportunity as the stock topped the list of the most brought equities by TD clients on the London market yesterday. However, far from being a contrarian value opportunity, Redcentric could be a value trap. 

Indeed, it’s not yet known how serious the company’s financial situation is. Yesterday’s statement was thin on specific details, as it would appear that even the senior management do not know how long the financial problems have been going on. 

Guessing the damage 

Until there’s more colour on the situation from the company and its auditors, investors can only guess how serious Redcentric’s problems are. 

City analysts have tried to shed some light on the issue, but their commentary is dotted with phrases such as ‘should,’ ‘maybe’ and ‘points to’, which basically means the analysts are just as much in the dark as investors.  

Still, for the time being, these estimates of the damage are all we have to go on. So what’s the City saying about Redcentric’s problems? 

Well, for a start, analysts are expecting a restatement to 2016 adjusted profits 35% to 40% with “significant adjustments to previously announced profits”. If the company does re-state years of accounts, it could quickly become apparent that Redcentric’s declines yesterday were nothing more than a re-rating of the shares. The company may have never been as profitable as historical figures suggest. 

Profit restatements are worrying enough, but they’re not as concerning as Redcentric’s debt warning. Specifically, the company warned in its Monday statement that the group will have to recalculate its banking financial covenants, which hints at the prospect that the firm could be in breach of its lending terms. 

Dangerous debt 

According to City analysts, primary covenants are net debt to EBITDA of 2.5 times, and a debt service covenant of 1.1 times. In its last trading update, Redcentric announced it was on track to reduce net debt to just under 0.8 times annualised adjusted EBITDA at the half year, falling to 0.6 times, including the proceeds of an asset sale. With such a big jump in debt levels predicted, it’s clear there’s something big going on here. Analysts predict the company’s debt could be £13m – £14m higher than the reported half-year figure. 

What’s more, as of yet, there’s no real indication of how deep the rot is on Redcentric’s balance sheet. Over the years the company has built up a large balance of intangible assets on its balance sheet through acquisitions. If the former CFO couldn’t keep track of the group’s debt, it’s extremely unlikely these intangibles won’t be subject to a re-evaluation. But with £92m of intangible assets on the balance sheet and £97m of shareholders equity, Redcentric has little to no room for manoeuvre. 

So overall, rather than speculate on a rebound in the value of Redcentric’s shares, it might be wise to avoid the company altogether. 

The post Now is not the time to buy Redcentric PLC appeared first on The Twelfth Magpie.

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• Is there any value left in Lloyds shares now they’re over £1?
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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The company shocked the market this morning by disclosing that a routine re-examination of the books prior to releasing interim results had “discovered mis-stated accounting balances in the group’s balance sheet.” Management went on to say “correcting these cumulative historic accounting mis-statements would result in a need to reduce net assets by at least £10m.” This is a major setback for a company that recorded £90.8m of net assets on the balance sheet at the end of the latest reporting period.

How deep do these problems stretch? Evidently the problems reach back over several years and were bad enough that the CFO was sacked on Sunday. Furthermore, management also revealed that writedowns to previous profits are likely and that net debt was materially higher than reported to the market.

The one figure included in the announcement was that management “believes net debt at the half year was approximately £30m.” This should worry investors for two reasons. One, net debt at the end of the latest fiscal year ending March 31 was initially reported as £25.3m. So, if it was reduced to £30m by the end of September then management isn’t exaggerating by saying the true figure was “materially” higher than reported.

The second cause for concern is the use of the word ‘believe’, as it illustrates the fact that the company is in the midst of its forensic accounting review and further problems could be announced. Of course, the situation could be also be better than expected and the company did attempt to reassure the market by saying it believes the problems were confined to previous years and that current sales are continuing nicely.

What to do?

What should all of this mean for investors? Well, it’s true that the mere mention of an accounting scandal can oftentimes lead the market to overreact and send shares plummeting for little reason. However, in this case the fact that management doesn’t yet know how much debt it has or how much it will have to restate past profits indicates to me that a wait-and-see approach is best for those on the outside looking in.

This means bargain hunters probably shouldn’t begin a position just yet, even though the company has solid growth prospects and shares are now trading at five times (reported) earnings. That said, contrarian investors may want to reassess this position once interim results and revised past reports are revealed. That’s because providing back end IT services such as cloud storage for mid-market firms is a large growth market with hefty margins and significant recurring revenue. And, even if Redcentric’s net debt is around £30m, it shouldn’t be an unmanageable amount for the highly cash generative company to handle. But, without knowing exactly what the company’s books look like it’s impossible to accurately judge its value. For that reason I would wait for the dust to settle before taking a closer look. 

The post Why have shares in Redcentric plc crashed by two-thirds today? 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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

dotDigital Group

Do you ever receive emails from retailers advertising their promotions and sales? I do and I have to admit, they’re quite effective at getting my attention. That’s why I like dotDigital Group(LSE: DOTD), a leader in the digital marketing space. Its key product Dotmailer enables firms to send customised marketing emails within minutes and the product is proving to be very popular with clients.

DotDigital has grown its revenues from £9m in FY2011 to £26.9m in FY2016 and shareholders have been well rewarded over the last five years with the share price jumping from around 8p in 2011 to over 50p today. However in my opinion, the company is still very much under the radar and I believe there’s more growth to come.

The group released another impressive set of results this week, with turnover and earnings per share increasing 26% and 12% respectively for the year ended 30 June 2016. Recurring revenues were lifted from 76% to 78%, and the company’s cash position was boosted to £17.3m at year-end, up from £11.9m last year. To top it off, dotDigital increased its final dividend from 0.36p to 0.43p and announced a special dividend of 0.41p, taking the total payout to 0.84p, a yield of around 1.6%.

The market was underwhelmed by the results, with the share price dipping a few percent on Tuesday, however that’s a pattern I’ve noticed before with dotDigital. The share price will fall on respectable results, but then move higher in the coming weeks and months.

I believe it’s an exciting time for dotDigital with the company looking to grow throughout the EMEA, North America and Asia Pacific regions. It currently trades on a P/E ratio of 24 times next year’s estimated earnings, which I don’t think is unreasonable for a company that’s growing quickly and consistently.

Redcentric

Another small-cap that looks to be flying under the radar is IT services provider Redcentric(LSE: RCN).

Redcentric offers its clients a range of IT services such as infrastructure, network, cyber security and cloud services and has built its business model around generating long-term recurring revenues from its clients. It’s a business model that appears to be working well, with revenue jumping from £58m two years ago to £110m for FY2016. Analysts predict revenues to continue climbing with growth of 9% and 8% forecast for the next two years.

The company announced in late September that with the help of recent acquisitions it was seeing low-double-digit headline recurring revenue growth for the first half of FY2017, and that the board remained confident in the outlook for the business.

After a 20% fall in the share price since May, Redcentric is now trading on an appealing P/E ratio of around 14 times next year’s estimated earnings, which looks to be good value to me.

The post Are these small-cap stocks set to soar? appeared first on The Twelfth Magpie.

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• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Edward Sheldon owns shares in Dotdigital Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, Tesco’s strategy could be enough to deliver exceptional share price gains. In other words, even though the external operating environment is likely to be tough, Tesco’s strategy of cutting costs, making asset disposals, improving efficiencies and delivering higher levels of customer service could cause its profitability to rise. And following rising profitability, investor sentiment could gain a boost and push the company’s share price considerably higher.

In fact, Tesco is forecast to increase its bottom line by 39% next year and with its shares trading on a price-to-earnings growth (PEG) ratio of just 0.5, they seem to offer 20%+ upside potential. Certainly, there may be challenges ahead and there’s scope for a downgrade to Tesco’s forecasts, but with a wide margin of safety the company’s risk/reward ratio has huge appeal.

Rising shareholder payouts?

Also offering upbeat share price prospects is voucher and gift card business Park Group (LSE: PKG). Its shares may have disappointed in the past and have fallen by 9% since the turn of the year, but they continue to offer upbeat growth forecasts. For example, in the current year Park Group is expected to record a rise in its bottom line of 8%, with growth of 4% being pencilled-in for next year.

With Park Group trading on a price-to-earnings (P/E) ratio of just 11.7, it seems to offer good value for money. However, in terms of a potential catalyst, the company’s income prospects could entice income-seeking investors to bid up the company’s share price. That’s because Park Group has a yield of 4% and with dividends being covered 2.1 times by profit, there’s scope for shareholder payouts to rise at a faster pace than earnings over the medium-to-long term.

Confident outlook

Meanwhile, cloud computing specialist Redcentric (LSE:RCN) also has a very bright future and could record a share price rise of over 20%. Its bottom line is expected to increase by 15% in the current year and by a further 10% next year as more businesses seek to shift away from traditional IT infrastructure and towards cloud or hybrid systems. As such, Redcentric seems to have a sound long-term growth profile, with it likely to benefit from increasing demand for its services in the coming years.

With Redcentric trading on a PEG ratio of only 1.5, it seems to offer at least 20% upside. And with it expected to increase dividends per share by over 10% next year to give a forward yield of 2.8%, Redcentric’s management team seems to be confident in its long-term outlook.

The post Will Tesco plc, Park Group plc and Redcentric plc rise or fall by 20%? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.