MENU

Should you follow Neil Woodford into these 2 under-the-radar mid-cap stocks?

Neil Woodford. Source: Woodford Investment Management Ltd

Neil Woodford released an April update for his Equity Income Fund last week, revealing that he has added a host of new names to the portfolio recently. Today I’m looking at two of these new stocks, Softcat (LSE: SCT) and Forterra (LSE: FORT), and asking whether investors follow Woodford into these mid-caps?

Softcat

I profiled IT infrastructure specialist Softcat back in January, stating at the time that the company offered broad exposure to the IT sector at a “reasonable valuation.” Back then, the stock was trading at around 300p after having fallen 20% on the back of Brexit slowdown concerns. However, four months later, those concerns appear to have dissipated, and Softcat shares now trade at over 440p. So with the stock up nearly 50% year-to-date, is Neil Woodford late to the party, or are there further gains on offer from here?

Looking at the big picture, I believe demand for Softcat’s services such as networking and security is likely to remain robust. And the company is enjoying significant momentum at present, announcing a revenue increase of 29% and an operating profit rise of 36% in its recent half-yearly results. Furthermore, in a signal of confidence from management, the interim dividend was lifted a huge 71% to 2.9p per share. Management stated that the half-yearly results demonstrated “excellent growth, further profitable market share gains and strong cash generation.”

On the bear case side, it should be noted that Softcat is a UK-focused company and therefore could suffer if a Brexit-related slowdown does happen. On a forward-looking P/E of 22 times FY2017 earnings, the stock is also considerably more expensive than back in January when it was trading on a P/E of around 15.

However with the IT specialist paying out a special dividend of 14.2p last year, and now increasing its interim dividend 70%, that suggests to me that management is confident about the future. As a result, I reckon there are probably further gains on offer for long-term shareholders.  

Forterra

Another new entrant into Woodford’s portfolio is Forterra, with the fund manager taking a significant stake in the UK brick manufacturer and explaining “we believe the company is well-positioned to benefit from steady growth in the UK construction industry in the years ahead.

Trading on a forward looking P/E of 11.3, Forterra doesn’t look expensive. However, I’m not convinced a great deal of growth is on the cards here. Indeed, City analysts are forecasting a revenue rise of a mediocre 4.6% for FY2017, and this is on the back of a rise of just 1.5% last year.  Furthermore, with 100% of revenue being generated from the UK, this is another company that could be affected if the UK was to endure a slowdown.

However on the bull case side, the company does appear to offer bright dividend prospects. Forterra paid a maiden dividend of 5.8p last year, and analysts are forecasting payouts of 9.1p this year and 10.1p next year, yields of 3.5% and 3.8% respectively. Therefore, if you’re bullish on the UK economy, as Woodford is, Forterra could have potential as a dividend growth stock.

Is this an even better investment opportunity?

While the two stocks I've covered above offer potential, analysts at The Motley Fool reckon they've uncovered an even better investment opportunity. 

The stock is listed right here in this exclusive report, One Top Small-Cap. 

If you'd like to find out the name of this company, for FREE, simply download your no obligation report, right here

Edward Sheldon has no position in any 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.