This FTSE 100 double-bagger isn’t the only stock I’d buy on the dips

Roland Head takes a look at a FTSE 100 (INDEXFTSE:UKX) growth star and a smaller alternative.

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Today I’m looking at two exciting tech stocks which could have serious growth potential. The only trouble is that neither stock is exactly cheap.

Although both stocks could still be a decent buy at current levels, I believe that the smart thing to do might be to add these to your portfolio during periods of weakness.

Profits up 32%

Fintech stock Gresham Technologies (LSE: GHT) produces software used by banks and financial businesses to help maintain the integrity of their data. Areas of operation include regulatory compliance, risk management and financial controls.

Shares in this £150m group surged 7% higher this morning, after it said 2017 sales are expected to have risen by 24% to £21.3m. Earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to be 32% higher, at £5m.

Both figures are in line with market expectations, but I believe the significance of today’s news is that EBITDA is rising faster than revenue. This implies that the group’s profit margins are continuing to rise. If this continues, profit growth could accelerate.

Don’t get carried away

Of course, it pays to consider the valuation of Gresham stock as well as its growth potential.

The London-based group’s main growth engine is its Clareti software business, where revenue rose by 48% last year. But this isn’t new information. Much of this growth potential is already priced into the shares.

One risk is that City analysts’ 2018 forecasts are surprisingly modest. Sales are expected to be broadly flat, while earnings per share are expected to rise by just 6%. Today’s update didn’t include any change to profit guidance for next year.

Today’s increase has left this stock trading on a 2017 forecast P/E of 33, falling to a P/E of 31 for 2018. In my view, the upside and downside risks are fairly evenly balanced, even if growth remains strong.

Gresham looks like a good business to me, but I’d prefer to wait for a cheaper buying opportunity.

FTSE 100 safety + growth?

How about a financial software stock that combines the stability of a FTSE 100 listing with internet-fuelled growth potential?

Management at Sage Group (LSE: SGE) would like you to believe that their accounting software fits the ticket perfectly. But the size of this business means that achieving strong earnings growth could be more challenging than at a smaller firm.

Sage shares have doubled in just over three years. Over the same period, the group’s reported after-tax profits have risen by around 60%. So the stock has got more expensive, because the price has risen faster than earnings.

But in fairness to the group’s management, if Sage hits forecasts for a full-year profit of £360m in 2017/18, this £8.7bn group will have doubled its profits in four years. That’s a fairly impressive achievement for a company of this size, in my view.

It’s for this reason that I’m attracted to Sage. The group’s operating margin of 20% and strong cash generation mean that management has been able to maintain dividend growth of 8% per year in recent years.

The stock is a little too pricey for me, on 24 times 2018 forecast earnings. But I am tempted and would certainly consider buying on any dips.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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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