While the majority of my stocks are dividend-paying large companies, I don’t mind the occasional investment in a fast-growing, smaller company. There are some very exciting smaller companies listed in the UK, and a small allocation to such firms has the potential to significantly boost portfolio returns. Here’s a look at one stock that has made me quite a bit of money.
First Derivatives
First Derivatives (LSE: FDP) is a big data specialist. The company’s goal is to provide its customers with efficient and flexible tools for ultra-high-speed processing of data. Its key product ‘Kx’ was designed to address one of the most basic problems in high-performance computing: the inability of traditional database technology to keep up with the rapid escalation of data volumes.
The £890m market cap company has a long history of working with some of the world’s largest financial institutions. However, in recent years, its technology has been used by clients in other sectors, such as the wider technology sector and energy. Just yesterday, the group announced that it has been selected by Red Bull Racing to analyse data from its Formula 1 vehicles.
A glance at the company’s financials reveals formidable recent growth. Indeed, over the last five years, revenue has climbed from £46m to £152m, and adjusted earnings per share have risen from 37.5p to 61.3p.
Half-year results released today reveal further progress. For the six months to 31 August, revenue increased 21% to £87.8m, and adjusted earnings per share climbed 19% to 34.4p. The company stated that it has a “strong pipeline” and that it had made a “positive start” to the second half of the financial year. Chairman Seamus Keating commented: “We anticipate a strong full-year financial performance, slightly ahead of the Board’s expectations.”
I bought shares in First Derivatives at a price of around 1,600p early last year. Today, they change hands for 3,520p. Would I buy more of the stock at the current share price? If the company can perform similarly in the second half of the year and generate full-year earnings of 68.8p, the forward P/E ratio is 51.2 right now. Personally, I’d be reluctant to add to my holding at that price. I’m really excited by the potential here, but after a 60% year-to-date share price rise, I’ll be waiting for a pull-back before buying more shares.
A cheaper tech stock
One tech stock that does look attractively valued right now, in my opinion, is Micro Focus (LSE: MCRO). The £11.5bn market cap group helps customers merge new technology solutions with existing IT infrastructure systems. I last covered the stock in late August, when it was trading at 2,270p. Today, it sits at 2,655p. However, despite the 17% share price gain, I believe there’s more to come.
The company’s merger with Hewlett Packard Enterprise (HPE) is set to create one of the largest tech firms in the UK. Investors have been concerned that Micro Focus might have overpaid and overstretched to buy HPE, however, the latter’s Q3 results released recently were received well by the market.
Going forward, I believe Micro Focus has the potential to reward long-term investors with both capital gains and dividends. The stock trades on a forward P/E of a reasonable 16.8, and a prospective dividend yield of 2.9% adds weight to the investment case.
