I tipped IQE plc as a stock to watch in January, but wouldn’t buy it now

Shares in IQE plc (LON: IQE) have soared over 225% in 2017. Do they still offer value?

| 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.

Shares in semiconductor wafer manufacturer IQE (LSE: IQE) have been getting plenty of attention recently, and that’s no surprise, as the stock has soared from under 40p to over 130p this year, a gain of over 225%.

I actually identified IQE as a stock to watch back in mid-January, in my article 2 cheap technology small-caps for 2017. The company had released a strong trading statement in December, and on a P/E ratio of under 14, the valuation looked appealing. I commented that “the company still looks attractively valued at the current price and it would not surprise me to see the share price run further this year.

Strong momentum 

Well the share price certainly has run further this year, for several reasons. The company released strong final results in March, followed by an upbeat trading statement on 20 July in which it stated that “overall wafer sales are expected to grow by c.16% against H1 2016″ and that “the Group has multiple high growth opportunities ahead.”

Moreover, rumours that IQE technology will be featured in the soon to be released Apple iPhone 8 have clearly boosted demand for the stock. A deal with Apple could be a game changer for the company, however, no formal announcement has been made yet. 

So with this fast-growing technology stock ‘triple-bagging’ this year, is it too late to buy now?

While IQE no doubt looks like an exciting company, personally, I’d be a little hesitant about jumping on board the stock now. A look at the three-year chart shows that the share price has risen in an exponential fashion in recent months, and with City analysts forecasting earnings of 3.27p per share for FY2017, the stock is trading on a lofty forward looking P/E ratio of 40 at present.

While high-quality small-caps do often trade at higher valuations than their slower-moving larger peers, a valuation of that magnitude leaves little margin for error. In other words, if the company misses analysts’ expectations, investors can get their fingers burnt.

So I’m going to continue to watch IQE from the sidelines for now. The company looks very interesting, however, the valuation is a little too high for my liking at the moment.

A more reasonable valuation 

One small-cap that does look attractively valued, in my opinion, is Restore (LSE: RST). The £550m market cap company provides services to offices and workplaces in the private and public sectors, specialising in document storage, document shredding, and workplace and IT relocation.

Restore has grown quickly in recent years, through both organic expansion and acquisitions, and revenues have climbed from £54m in FY2013 to £129m last year. Analysts forecast revenue of £169m this year and earnings of 21.1p per share, which at the current share price, places the stock on a more reasonable forward P/E ratio of 23.5.

Restore has paid out an increasing dividend for the last five years, and while the yield isn’t high at just 0.8%, dividend growth of 300% over the last half decade is impressive. This is a sign that the company is profitable, generating cash, and in sufficient financial health to return excess cash to shareholders.

The stock has been a good performer this year, rising approximately 25%, however I believe there could be more upside to come over the medium-to-long term.

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.

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

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

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

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

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

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »