Will FY results keep these two stocks flying high in 2017?

These two smaller stocks could be up there with the winners of 2017.

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Thursday’s results include two I find very intriguing, from two very different companies. I see both as attractive long-term investments.

Turnaround specialist

Melrose Industries (LSE: MRO) is an unusual company, and tricky to value, because of the nature of its operations — it acquires businesses that should be doing better and tries to turn them around. Results for 2016 pleased investors, who pushed the shares up 13% to 247.5p, after the figures “exceeded market expectations“.

Chairman Christopher Miller called it “a tremendous year“, and focused on the performance of Nortek, whose acquisition was completed in August 2016. Nortek is apparently exceeding expectations, and the firm is already looking for its next acquisition.

Underlying pre-tax profits came in at £96.4m (compared to £2.4m the year before), and strong cash generation allowed the firm to reduce its net debt since acquisition to £541.5m. There’s a 2.2p dividend per share, up from 1p in 2015, and a progressive policy is expected to raise that to yield close to 2% by 2018.

With the way Melrose operates, profits from year to year can be very erratic — it can take a few years to turn a company around and the wait for the next big payday can be a long one. As such, the firm’s forward P/E ratio, which currently stands at 24, is perhaps not too meaningful.

But my colleague Zach Coffell recently worked out that between 2003 and 2015, Melrose has brought home an average annual return for shareholders of 22%. And it’s turned a net shareholder investment of £0.1bn into £2.9bn over that period.

And if that’s not a record that should have investors wetting themselves with excitement, then I don’t know what is. For me, Melrose is one for a minimum investment of 10 years, ideally a lot longer, and is not one for short-term traders.

Medical prospects

My second pick is ConvaTec (LSE: CTEC), a firm that only came to market in October 2016. It is in the medical technology business and specialises in ostomy care, wound therapeutics, continence and critical care, and infusion devices.

The shares picked up 5%, to 256.6p, after the company reported a 4% rise in revenue leading to a 6.5% gain in adjusted EBITDA. Adjusted earnings per share put on 30% to reach 13 cents per share (all at constant exchange rates).

Chief executive Paul Moraviec said that all four of the company’s franchises are performing well, with its Advanced Wound Care franchise “particularly strong” and added that “strategic initiatives in Ostomy Care are gaining traction“. The firm is apparently ahead of schedule in its strategy for raising margins, and should see about half of its target of a 300 bps improvement achieved in 2017.

At this stage and with very little track record as a public company, I find ConvaTec a bit challenging to value. But the City’s analysts are forecasting a near doubling of EPS in 2017 to put the shares on a PEG of just 0.2 (where anything less than about 0.7 tempts me), and a further 11% gain pencilled-in for 2018 would put the shares on a P/E of approximately 15.

Dividends should be yielding around 2.6% by then, with the company telling us it is “targeting a payout ratio of between 35% and 45% of adjusted net income over time“.

Overall, I like the look of ConvaTec, and I see another here that’s probably worth tucking away for a couple of decades.

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.

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

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