2 exciting momentum stocks with massive potential

These FTSE 250 stars look well placed to soar even higher, says Harvey Jones.

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These two FTSE 250 stars have seen their share prices rising almost 50% in the past 12 months alone. The future could look just as dazzling.

Full of life

Diploma (LSE: DPLM) is international business supplying specialised technical products and services in the life sciences, seals and controls sectors. And it looks like a rewarding place to be, with the share price up more than 50% in the last 12 months. Over five years it has grown 156%, with its performance chart showing an impressively steady upwards climb. Full marks so far. Can its success continue?

Earlier this month, its half-yearly report revealed an impressive 21% rise in revenues and adjusted operating profits to £217.3m and £37.4m respectively, and a 29% rise in profit before tax to £32.9m. Adjusted operating margins held steady at 17.2%, while adjusted earnings per share (EPS) rose 23% to 23.9p.

Full honours

Chief executive Bruce Thompson hailed the group’s strong underlying growth, while acknowledging that it enjoyed a one-off boost from the substantial depreciation in UK sterling. He said the complementary acquisition of Abacus in April has added critical mass and opens up further growth opportunities in healthcare, while the pipeline for acquisitions remains encouraging.

The trading outlook looks positive as City analysts forecast a 15% rise in EPS in the year to 30 September 2017, followed by another 6% in 2018. Revenues and profits also look set to rise strongly. Today’s yield may look low at 1.8% but that is partly a consequence of the stock’s rapid growth. The dividend payout is nicely covered 2.1 times and management is progressive, recently hiking the interim dividend 13% to 7p per share. Investing in Diploma could prove a rewarding education, if you can accept its heady valuation of 26.73 times earnings.

Elementis, Dr Watson

Elementis (LSE: ELM) is up 44% over the past 12 months, although its five-year track record is less impressive than Diploma’s. In June 2015 the speciality chemicals company’s shares plunged 17% to 257p after it issued a profit warning. That was down to the US oil sector slump, which knocked 30% off sales of its additives used in drilling, and weaker Chinese demand for its coatings additives.

Now Elementis is bouncing back, as the US shale industry makes a vibrant comeback and the Chinese economy holds up, with the key manufacturing purchasing managers index showing growth at 51.2 for a second straight month in May.

Chemicals brothers

Elementis is a global operation that employs around 1,400 people in more than 30 worldwide locations, serving customers in North and South America, Europe and Asia Pacific. Last month’s Q1 trading statement reported stronger demand across most of its markets, with further progress expected as it remains on track to increase operating profits.

At 22.7 times earnings it isn’t cheap, although forecast EPS growth of 16% in the 2017 calendar year and 13% in 2018 largely justify that. This reverses falls of 17% and 18% in 2015 and 2016, suggesting that the company is back on track. Its well-covered dividend is forecast to hit 2.5%. The company is in its element right now, although recent volatility shows that it requires healthy demand from a buoyant global economy. Are you feeling bullish?

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.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Elementis. 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.

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