Could this small growth stock outperform BT Group plc?

G A Chester discusses BT Group plc (LON:BT.A) and a little-known growth stock.

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Shares of BT (LSE: BT-A) were trading at around 400p when it announced it had entered exclusive negotiations to acquire mobile network EE in December 2014. By the time it announced it had agreed definitive terms the following February the shares were above 440p and they touched 500p after the completion of the deal was announced in January last year.

The market clearly warmed to the mega £12.5bn cash-and-shares acquisition (making BT the UK’s leading converged communications provider) in the expectation of enhanced future returns for shareholders. However, after a spate of costly problems in other areas of the group — including fraud in its Italian business and historical failings in its Openreach business — investor sentiment is now at a low ebb, with the shares trading at multi-year lows of under 300p.

Contrarian opportunity

Despite recent problems, management changes and an ongoing underfunded pension scheme, the fundamental investment case for BT isn’t radically different to when the shares were 500p. A current-year forecast P/E of 10.5 looks good value to my eye, with earnings growth forecast to resume the following year.

Likewise, a trailing dividend yield of 5.3% has considerable appeal, because the board has signalled its confidence in the future by retaining a progressive dividend policy, albeit with a current-year increase to be lower than the 10% previously targeted.

BT now looks to me like a classic contrarian opportunity and is a stock I would be happy to buy today on that basis.

A little-known growth stock

If the FTSE 100 telecoms giant gets back on track, it should deliver strong gains for investors from today’s sub-300p price. It may take a successful small growth stock to outperform it. Could Attraqt (LSE: ATQT) be such a stock?

This online visual merchandising company is probably unknown to most investors, despite having a client base of over 230 familiar retail names. At a share price of 48.5p — unchanged after the release of its half-year results today — AIM-listed Attraqt is valued at £52m.

Attraqtive

Having completed a major acquisition of complementary business Fredhopper in March, Attraqt today reported a 227% rise in revenue to £5.5m for the six months ended 30 June. It said the H1 annualised exit rate was £16.5m and that it has continued to see “significant sales momentum” since the period end.

Valued at just over three times running sales and comfortably below three times likely forward 12-month sales, the stock looks attractively priced for a company with promise of strong top-line growth. This promise is supported by 41 upgrades and over 100 client renewals during H1, a growing number of new names signed during and since the period end and rising new contract values.

Today’s results show a £3.2m pre-tax loss in H1, although £2.1m was down to exceptional costs related to the Fredhopper acquisition. Ahead of today, the one broker covering the stock (presumably the house broker) was forecasting underlying earnings per share of 1p for the full year, rising to 2p next year. The latter gives an earnings multiple of 24.25 at the current share price, which again looks attractive for the growth potential.

As such, I rate Attraqt a risky ‘buy’ — risky not only because it’s a small-cap, but also because the e-commerce software market is a rapidly evolving one.

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 of the 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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