Could these hot FTSE 250 stocks help you retire early?

Are there big gains in store for investors in these FTSE 250 (INDEXFTSE:MCX) stocks?

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Engineering software group Aveva (LSE: AVV) this morning released a trading update ahead of its AGM. The company, which yesterday caved-in to pressure from shareholders to withdraw a share-awards plan for senior employees, said it had made “a solid start” to its new financial year and that “the full-year outlook remains in line with the Board’s expectations.”

The shares edged higher in early trading to above 2,000p, taking its gains to 60% since a multi-year low in February last year.

Doesn’t move the dial

Aveva’s core end markets of Oil & Gas and Marine, which together account for over 60% of group revenue, have been in a cyclical trough over the last three years. However, the company confirmed today the early signs of improvement in Oil & Gas that it had noted in its annual results in May.

This, together with the full-year in-line outlook, means there should be little, if any change to analysts’ forecasts. Indeed, the fact that the shares have retreated towards yesterday’s closing level of 1,975p, as I’m writing, shows that today’s update doesn’t really move the dial.

Earnings upgrades needed?

The City consensus is for an 8% increase in earnings to 72.2p a share, giving a price-to-earnings (P/E) ratio of 27.4 and a price-to-earnings growth (PEG) ratio of 3.4. These are high ratings and they remain elevated at 25.6 and 3.7, respectively, when we look ahead to forecasts for the company’s 2018/19 financial year.

Aveva is a sound business with a strong balance sheet — net cash has increased to £152m from £131m over the past three months — but it looks to me as if we’d need to see upgrades to earnings forecasts for the shares to move materially higher from their current level.

Prodigious demand

In contrast to the headwinds Aveva has faced, another FTSE 250 tech firm, Sophos (LSE: SOPH), has enjoyed a backdrop of prodigious demand in its area of business.

This cyber-security solutions group has seen its shares soar from an IPO price of 225p in July 2015 to a current 438p, giving it a market cap of just over £2bn. The latest leg-up came after it posted forecast-busting 2016 results in May.

Attractive ratios

For 2017, the City is expecting to see revenue of $628m (£487m at current exchange rates), rising to $732m (£567m) in 2018. This gives a price-to-sale ratio of 4.2, falling to 3.6, which strikes me as attractive for a company whose top line is advancing strongly.

Turning to the bottom line, earnings are forecast to leap 43% from $0.07 (5.4p) a share to $0.10 (7.7p). The resulting P/Es of 81 and 57 are markedly higher than Aveva’s, but Sophos’s much higher forecast earnings growth gives it a far more appealing PEG of 1.3.

Flattering highlights

Not that the company’s management shouts much about such standard numbers as revenue and earnings. Instead they headline things like “billings” (significantly higher than statutory revenue) and other flattering metrics like “cash EBITDA” and “unlevered free cash flow”.

While this irks me (and could be viewed as a red flag), City analysts appear to have no concerns. Of nine brokers tracked by financial website Digital Look, seven rate Sophos a “strong buy”, one a “buy” and one is “neutral”.

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.

G A Chester 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.

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