IQE plc isn’t the only growth stock that could make you a millionaire

G A Chester discusses the investment outlook for buzz stock IQE plc (LON:IQE) and a less volatile growth company.

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The AIM market has soared 55% over the last two years, giving investors in smaller growth stocks plenty to cheer about. Technology firm IQE (LSE: IQE) has been one of the biggest winners, its shares rocketing from 20p to a high of over 180p late last year.

News flow through 2017 was strongly positive, with word of a major deal with Apple and the market waking up to the potential for IQE’s tech to become ubiquitous in what is set to be the massive Internet of Things market. I’m sure the company could become a major player but it’s perhaps another matter as to whether it will.

Good value for money?

Since the exuberance of late last year, the shares have retraced. They’re trading at 108p, as I’m writing, valuing the business at a bit over £800m. Given the growth potential, the shares look good value on a rating of 25 times forecast 2018 earnings, falling to 18 times for 2019.

However, as my Foolish friend Edward Sheldon pointed out earlier this week, a number of super-smart hedge fund managers are betting against the company. Indeed, according to regulatory notifications of short positions published by the FCA, I calculate IQE has become the most heavily shorted stock on AIM, with 11.73% of its shares having been sold short as of 31 January.

According to an article by Reuters, short sellers are convinced IQE will lose its dominant position. I have a great deal of respect for the depth of research undertaken by short sellers (if they call it wrong, their losses are unlimited in theory), so I’m always wary in these situations.

However, with IQE saying “we’re pretty confident we have a significant lead technology-wise” over competitors, and the size of the upside should this prove decisive, I’m inclined to rate the stock a ‘risky buy’.

Get rich slow

A.G. Barr (LSE: BAG), the owner of some great drinks brands including Irn-Bru, Rubicon and Strathmore, is a somewhat different growth proposition to IQE. Founded in 1875 and floated on the stock market in 1965, the company is a fine example of a get-rich-slow consistent growth stock. Its share price has increased 10-fold over the last quarter of a century, while for the past 10 years, annualised total returns have run at over 14%.

Now a FTSE 250 stock, valued at £755m on a share price of 655p, Barr issued a positive trading update today for its financial year ended 27 January. It said it expects revenue for the year to be 7.5% ahead of last year and that despite external cost pressures from the weakness of sterling, “we remain confident of delivering profit growth for the year in line with our expectations”.

The company advised that it’s well prepared for the soft drinks sugar tax coming in April. It now expects that up to 99% of its portfolio will contain less than 5g of total sugars per 100ml. It added that the consumer response to new Irn-Bru “has so far been encouraging” and that the company remains well placed “to grow our business and deliver long-term value to shareholders.”

Trading on 20.5 times forecast earnings for the year to January 2019, with a forward dividend yield of 2.5%, I see Barr as an excellent stock to buy for continued consistent growth in the decades to come.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool UK has recommended AG Barr. 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.

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