Cheap growth shares may seem like a bit of an oxymoron, but for investors willing to plumb the small-cap depths of the LSE, there are a handful of companies that combine these two characteristics. One such firm that’s caught my eye is software quality assurance tester SQS Software (LSE: SQS).
The German firm’s shares trade hands at an attractive 13.6 times forward earnings, despite seven straight years of sales growth and management nearly doubling earnings over the last four years to €0.47 per share by 2016.
The key has been steadily increasing demand for the company’s quality assurance testing, alongside accelerating growth from its consulting arm. Looking ahead, the future appears bright for overall global demand for SQS’s services as more and more software is designed to operate everything from cars to household appliances and industrial machinery.
On top of sales growth, the company’s management team is also focusing on margin improvements by shifting focus to higher-margin consulting work. In the short term this is causing some jittery nerves among investors as it involves managing the steady decline in sales from low margin, short-term contracts in its professional services division that still accounts for 29% of sales.
However over the long term, this shift should be encouraged as it fits into management’s plan to increase EBIT margins to 9%. Good progress is already being made toward this target with H1 2017 EBIT margins rising from 6.9% to 7.5% year-on-year. As SQS expands its offering and solidifies its market-leading position, there is considerable room to improve margins, cash flow and sales through cross-selling higher margin consulting work.
Together with overall market growth, a growing 2.4% dividend yield and a very reasonable valuation, I reckon SQS is worth a closer look from growth-hungry investors this month.
A safer way to cash in on tech stocks?
If you’re looking for exposure to the tech industry but prefer a more diversified approach, you may be keen on Polar Capital Technology Trust (LSE: PCT). At the end of June, the fund owned the shares of 121 global tech firms with the top 15 accounting for roughly half of the portfolio’s value.
As is common with investment trusts, the fund trades at a slight 2.2% discount to its net asset value (NAV). This reflects ongoing annual management fees of 1% on assets up to £800m and performance charges of 15% when returns exceed that of the benchmark Dow Jones World Technology Index.
For investors who aren’t put off by paying these ongoing fees, the fund does offer an easy way to hold a basket of predominately foreign tech shares as UK stocks account for only 1.4% of the portfolio. Unsurprisingly, North American stocks are the most represented with Alphabet, Apple, Microsoft and Facebook alone accounting for 25.6% of the fund’s assets.
