Here’s why smart investors are ignoring these 2 growth stocks

Bilaal Mohamed explains why investors should think twice before buying these two shares, despite good news from one and a bargain valuation for the other.

| 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.

Defence technology firm QinetiQ Group (LSE: QQ) cheered investors last Friday with the news that it had secured a £1bn contract amendment to deliver modern air ranges and test aircrew training for the Ministry of Defence (MoD). The deal is effectively an extension to the Long Term Partnering Agreement (LTPA) from the MoD under which Test & Evaluation services have been delivered since 2003, committing approximately half the core LTPA revenues until 31 March 2028.

Not getting excited

Under the agreement the Farnborough-based engineering firm will modernise and operate the air ranges at MoD Aberporth and MoD Hebrides, and test aircrew training through the Empire Test Pilots’ School at MoD Boscombe Down. The company believes that efficiencies delivered through this programme will enable future MoD and QinetiQ investment in developing further world-class Test & Evaluation services.

So great news for QinetiQ fans, but is that enough to get new investors on board the FTSE 250 firm? Well, despite the magnitude of the contract win, the company’s shares ended the day pretty much where they started, and so far the market hasn’t shared management’s enthusiasm or excitement with regards to the contract win. It was much the same last month when the company issued positive interim results for the first half of its financial year.

Positive results

For the six months to the end of September QinetiQ reported an increase in orders to £376.8m compared to £228.4m for the same period last year. This was helped in no small part by the award of a £109m 11-year renewal from the MoD for the Naval Combat System Integration Support Services (NCSISS). But again the news seemed to go unnoticed, with the market refusing to get excited about the half-year results.

Sure, the contract wins will boost the group’s top line, but analysts are expecting underlying profits to come in 4% lower for the full year to the end of March, with no growth in sight until at least FY2019. For that reason I’m rating the shares as a hold at best, and I would suggest new investors wait for a return to growth before diving in.

Ongoing problems

Another hi-tech engineering firm I’m refusing to get excited about at the moment is Senior (LSE: SNR). The Hertfordshire-based group has been under severe pressure this year shedding a quarter of its value as on-going problems in its Flexonics division were compounded by a slower-than-expected ramp-up of new programmes for its Aerospace business in the third quarter.

The Flexonics division, which makes heat exchange solutions for the energy generation and diesel engine markets, has struggled throughout 2016, suffering from softer truck and off-highway vehicle markets, plus the downturn in oil and gas sector activity.

October’s profit warning brought the share price to near five-year lows but I still don’t see the shares as a good contrarian play with earnings forecast to shrink 25% for the full year ending 31 December. I would want to wait until the troubled Flexonics division returned to good health before giving the shares another look.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »