One monster growth stock I’d buy before IQE plc

This fast-growing internet stock could outperform IQE plc (LON:IQE), says Roland Head.

| 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.

When I wrote about semiconductor wafer manufacturer IQE (LSE: IQE) in January, I suggested that the shares could be worth buying at under 110p.

The shares fell to 100p early in February, but have since bounced back to around 140p. So should you continue to buy this stock?

What just happened?

Last month’s dip seems to have been the result of two short-selling reports, released by analysts betting on the shares to fall. As things stand, I don’t think they’ve found a smoking gun. There doesn’t appear to be any evidence of serious problems at IQE.

Brokers covering the stock certainly weren’t moved by the reports. Their consensus view of expected earnings for 2017 and 2018 has remained unchanged. Adjusted earnings are expected to have risen by 8% to 3.25p per share in 2017. An increase of 30% to 4.25p per share is expected for the current year, putting the stock on a forecast P/E of 34.

My view on IQE

Sales of the firm’s advanced wafers seem to have risen strongly in 2017, especially Infrared products (+10%) and Photonics (+100%). The company believes that its intellectual property and scale has given it “a sustainable lead” in the Photonics market.

Although the shares might look expensive on a 2018 P/E of 34, forecasts for strong earnings growth give the shares a price/earnings growth (PEG) ratio of 0.9. That’s not expensive. Indeed, a PEG ratio of less than one is often seen as cheap.

However, the company’s past performance hasn’t really convinced me that it has the exceptional growth rate or the high profit margins needed to become a tech superstar. My view remains that these shares are a little too expensive.

One growth stock I would buy

I’ve owned shares in internet marketing group XLMedia (LSE: XLM) before. Having looked at today’s figures from the firm, I wish I’d held onto them.

This company makes money by generating online leads for other firms, mainly in the gambling sector. Sales have risen by an average of 38% per year since 2011, while profit growth has averaged about 25% each year.

These growth rates were largely maintained in 2017. Sales rose by 33% to $137.6m last year, while pre-tax profit rose by 27% to $39.3m. Earnings per share rose by 25% to $0.15, putting the stock on a trailing P/E of 17.

Why I like this stock

XLMedia has faced concerns about its heavy exposure to the gambling sector. So far, it seems to have been plain sailing. But the company is now taking steps to diversify into other potentially profitable areas, such as personal finance and cyber security.

After a long period of fairly slow gains, the shares have risen by 60% over the last year. One attraction is that the group’s profit margins have been consistently high. XLMedia generated an operating margin of 29.6% last year.

The shares have fallen 4% today, perhaps because earnings are only expected to grow by 8% this year. Personally, I’m not too concerned. XLMedia has the cash needed to make further acquisitions and if this isn’t possible, then it might return some of these funds to shareholders.

Trading on 16 times forecast earnings and with a 3.1% yield, I believe this stock remains a buy for growth.

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.

Roland Head 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.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »