Why I’m considering buying this UK micro-cap growth stock

Rachael FitzGerald-Finch considers whether impressive microcap Quartix Holdings is a buy now opportunity.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Smaller companies can have a hard time competing for investors’ money. It’s often said that their futures may be more uncertain – they’re usually younger and less stable than their larger peers.  However, for an enterprising investor with a diversified portfolio and a taste for strong company fundamentals, I believe micro-cap Quartix Holdings (LSE: QTX) could be a great long-term growth stock pick.

An expanding market

With a market value of £195m at the time of writing, Quartix is a UK-based supplier of integrated tracking and telematics data analysis solutions for commercial fleets and motor insurance providers. With the global market for these systems predicted to grow at 18.9% between 2018 and 2024 – thanks to development of smart logistics and intelligent transportation systems – Quartix has a probable expanding customer base.

Good cashflow

A current ratio of 1.12 is slightly lower than some investors would like. However, over half the company’s capital on-hand is cash – and only 10% inventory – meaning it can pay its way quickly and easily. In addition, and unusually for a technology micro-cap, Quartix has negligible long-term debt, freeing up cash for investing or dividends.

Notably, Quartix includes money spent on upgrading its fleet business in its sales costs. An accounting technicality perhaps but one that could lower the company’s expected earnings and increase the price-to-earnings (P/E) ratio.

Repositioning for growth

At 31.3 the P/E ratio is lower than the software industry average of 32.2, suggesting that Quartix may underperform its peers. However, during the first half of 2019, the additional investment in marketing and distribution has grown the subscription base by 12% and the overall fleet business market revenues by 11%. 

These gains, though, have been offset by declining insurance business revenues but Quartix is keen to stress the refocussing of the company on fleet operations; only considering the cash-generating insurance business that properly values its offerings. The likely lower earnings for 2019 could put a small dent in the previous five years’ average 10% earnings growth.

Increasing share price…but not assets

Quartix experienced a recent rapid increase in share price – indicating high demand for the stock and further inflating the P/E ratio.  The prior five years have seen Quartix delivering a 163% shareholder return, compared with an industry average of 29.6%, and its return on capital employed, at 46.24p, is impressive.

However, the current stock price could be too high: net tangible assets per share was 1.77 at 268p per share, but the current higher share price of 407p will deflate this figure significantly.

The share price increase also dampens the prospect of an average 3.1% dividend yield since 2015, but a dividend growth rate of 33% for this period is not to be sniffed at. Neither is the dividend policy of approximately 50% operating cashflow. The cash pay-out ratio of 46% signals the dividend is well covered by cash generated within the business.

As an apparently well-run micro-cap in a growth market, Quartix has much potential. But at its current size, it maybe be too pricey for some.

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.

Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has recommended Quartix. 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.

More on Investing Articles

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »