Are you willing to invest in shoot-the-lights out growth stocks, even if they are a little bit pricey? If I was going to do so, I would look at the following two FTSE 100 forgotten growth heroes that I think might be worth investigating.
Chemicals brothers
Croda International (LSE: CRDA) is not exactly a household name, but this speciality chemicals company deserves respect among investors as its share price has climbed 98% in the past five years, almost doubling investors’ money. That compares to growth of just 12.2% across the FTSE 100 as a whole. This is a real market-beater.
The momentum continues, with its share price up almost 10% year-to-date. There is one hitch. Success comes at a price, in this case a forecast valuation of 25.2 times earnings. A figure of 15 is usually seen as fair value here. Croda ain’t cheap.
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Catch 2
There is another catch. It has a low yield, just 2%, covered twice by earnings. Basically, all that share price growth has driven up the valuation and driven down the yield. Management has still been generous with shareholders, making good use of the 57% rise in free cash flow last year to £155.4m. This helped fund a 7.4% hike the full-year ordinary dividend to 87p, announced in February, and a £150m special dividend of 115p per share.
My colleague Royston Wild has been impressed by Croda’s restructuring strategy and reckons this is the type of company that could sail through global economic storms. Earnings per share (EPS) are forecast to grow 5% this year and 7% next, making it one of the more solid propositions that I’ve cast my eyes over lately.
Micro magic
My other pricey pick is UK tech champion Micro Focus International (LSE: MCRO), whose share price is up a stomping 140%, measured over five years. It is up a whopping 55% over the last six months, which makes it one of the top momentum stocks on today’s FTSE 100, but there’s a reason for that.
Micro Focus issued a profit warning a year ago, which halved its share price from above 2,000p to around 950p. So most of the recent surge has been clawing back those shock losses. At today’s 1,975p, the recovery may now be complete.
Keep your Focus
It is always risky jumping late onto a bandwagon, especially with analysts ringing alarm bells about the global economy. The £8bn group trades at a dizzying valuation of 27.5 times earnings, but that is set to change. With the group’s EPS forecast to rise a barnstorming 138% this year, the forward valuation shrinks to a more reasonable 12.1 times earnings.
You get decent income as well, with a forward yield of 4.2% and cover of 2.1. Operating margins of 32% and a return on capital employed of 57.2% look tempting to me.
Out of the ordinary
As Rupert Hargreaves recently pointed out, Micro Focus has lavished investors with special and ordinary dividends and is dishing out a further $1.8bn following the $2.5bn sale of its SUSE business to Swedish buyout group EQT Partners. It knows how to show investors a good time.
I think Micro Focus merits further attention. Although maybe we have missed the best of the recent share price surge.
