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Why I’d buy double-bagger Ashtead Group plc ahead of Versarien plc

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For growth investors, it’s easy to rule out big-cap stocks using legendary investor Jim Slater’s argument that “elephants don’t gallop”.

But from time to time, these heavyweights do pick up speed. US-focused plant hire specialist Ashtead Group (LSE: AHT) is a case in point. Shares in the firm have doubled since early 2016, earning Ashtead a place in the FTSE 100 index.

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Growth remains strong. Underlying rental revenue rose by 20% to £1,774m during the six months to 31 October, lifting the group’s underlying operating profit by 21% to £591.3m. That represents an underlying operating margin of 33%, which is very good.

Chief executive Geoff Drabble says that the firm’s strong first-half performance was “supplemented by clean-up efforts” following a particularly severe US hurricane season. This has left the group on track to deliver full-year results “ahead of our prior expectations”.

Could the stock double again?

The company plans to increase its footprint in the US market by 50% by 2021. The US plant hire sector remains fairly fragmented with many smaller companies which are potentially suitable for acquisition.

Ashtead is stepping up its efforts to consolidate this market and spent £298m on bolt-on (small) acquisitions during the first half, up from £142m last year. Despite this, the firm’s ratio of net debt to EBITDA remained unchanged at 1.8 times. This is well within the group’s banking limits.

The shares look fairly priced to me on around 16 times forecast earnings. The share price may gain further support from a £500m-£1bn share buyback programme planned for the next 18 months. Personally, I’m not sure this buyback offers great value for investors, given that shares are at record highs. But if underlying earnings continue to grow, the buybacks could help to drive further gains.

In my view, the shares remain a buy for growth.

One stock I’d sell

Ashtead isn’t cheap, but its growth is based on real cash profits. That’s not something that can be said of small-cap materials engineer Versarien (LSE: VRS), whose shares have risen by a staggering 595% so far this year.

Investors in this group hope that its proprietary “Nanene few layer graphene nano-platelets” will find commercial applications in several industries. Recent research agreements announced by the firm include a “global chemical major” and Israel Aerospace Industries.

However, such deals are fairly common among high-tech firms, and don’t always lead to commercial success.

Nanene doesn’t yet appear to generate any meaningful revenue for Versarien and the group’s legacy business is quite modest. Group revenues totalled just £4.38m during the first half of the year and the company reported an overall loss of £0.77m. Reported net assets were just £5.72m.

These figures lead me to think that the company’s market cap of £117.2m is probably too high. Versarien is expected to report another loss next year, before making a modest profit of 0.6p per share in 2018/19. That implies a 2018/19 forecast P/E of 132. In my view that’s excessive for a company that has never made a profit since listing in 2013.

I believe the good news is already reflected in Versarien’s share price. If I was a shareholder, I’d definitely be selling in order to lock in this year’s outstanding profits.

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Roland Head 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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