If you want to make a million from shares, the best way to do so is to buy stocks that have a robust business model, competitive advantage and record of achieving excellent returns for investors.
With this in mind, I’ve picked out Microgen (LSE: MCGN) and Avation (LSE: AVAP) as two stocks that I believe could generate enormous returns for investors in the years ahead.
Increasing shareholder returns
Avation leases planes to airlines, a business which has grown tremendously in recent years.
Leasing companies like this can achieve a lower cost of financing than larger carriers, and their size means that they can buy planes at lower prices from manufacturers. Because airlines sign multi-year leases, income is stable and predictable. Meanwhile, cash generated from operations can be used to grow the business, as well as being returned to investors.
According to a pre-AGM statement published by Avation today, at the end of 2017, the group’s fleet will contain 37 aircraft worth over $1bn. The average aircraft age is 2.9 years and the average weighted lease duration is 7.9 years. For the 2017 financial year, management is forecasting total lease revenue growth of 32% to $94.2m and pre-tax profit growth of 18% to $21.4m.
Over the past five years, reinvestment of lease income into its operations has seen its book value per share grow at a rate of 16% per annum. Over the same period, the shares have continually traded at a discount to book, but the discount has closed in recent months.
If the firm can continue to reinvest at this rate, and the shares continue to trade at a price-to-book ratio of 0.9, the shares could return 16% or more per annum going forward. Add in the company’s 2.1% dividend yield, and you get a total return of 18% per annum. At this rate, you could double your money every four years.
Specialist provider
Microgen provides financial management software applications, which is a highly lucrative business. As more regulations are placed on the financial services industry, companies that can help enterprises to make sense of all the requirements, are seeing sales boom.
Indeed, for 2015 and 2016 Microgen’s earnings exploded by 28% and 34% respectively and City analysts are expecting growth of 24% for 2017, followed by 20% for 2018.
If the company can hit these targets, I believe that there could be further gains ahead for the stock. While the shares might seem expensive, trading at a forward P/E of 30, this value does not seem to be too demanding considering the growth on offer here. What’s more, due to the specialist nature of the service Microgen provides, clients tend to be sticky, so the likelihood that sales will vanish overnight is low.
And just like Avation, to help complement growth, Microgen is reinvesting earnings into the business. Bolt-on acquisitions are helping the firm expand its existing offering and expand into new areas. The latest deal was the £10m acquisition of US-based RevStream, a provider of revenue management enterprise software.
