Neil Woodford’s reputation has taken a battering recently as some of the former star fund manager’s top stock picks have turned out to be terrible investments. However, while some of Woodford’s positions haven’t worked out too well, others have smashed the market. A great example is IT infrastructure business Softcat (LSE: SCT).
Rising demand
Over the past year, shares in Softcat have returned just under 70% excluding dividends outperforming the FTSE All-Share by approximately 68%.
These returns look set to continue as today the company announced that trading for the six months to January 31 was better than management had expected with adjusted operating profits rising 19% year-on-year “reflecting consistent performance across the period and further successful execution of the strategy.”
Following this robust fiscal first-half performance, management now expects trading for the full year to exceed City expectations. Previously, analysts had been expecting the company to report net profit growth of around 10% for fiscal 2018 and earnings per share growth of 11.7%. It now looks as if these forecasts may turn out to be conservative.
If the company can maintain its current rate of growth, shareholders could be set for windfall profits in the year ahead. Analysts had previously been expecting the group to increase its dividend payout by 100% from 9p to 18p for full-year 2018, giving a dividend yield of 3.5% up from 1.7%. A better than expected trading performance implies that a better than expected dividend distribution may also follow. With just over £61m of cash on the balance sheet as well, the firm has plenty of financial firepower to increase returns to investors.
Growth just getting started
I believe that over the next few years, Softcat should continue to produce impressive returns for investors as the demand for IT services increases. The company provides organisations with IT solutions such as data centres, networking and security solutions, the need for which is only going to grow. If the business continues on its current trajectory, investors should be rewarded over the long term.
As Softcat roars ahead, outsourcing business Sanne (LSE: SNN) is struggling to retain investor attention.
Sanne provides administration and fiduciary services for corporations and the fund management sector, a specialised business where reputation counts for everything. Increasing demands by regulators, coupled with bolt-on acquisitions are helping the firm’s earnings multiply. After growing by 55% last year, City analysts have pencilled in earnings per share growth of 84.4% for 2017 followed by an increase of 17.3% for 2018.
Unfortunately, these growth projections have attracted investor attention, and the shares are quite expensive. At the time of writing shares in Sanne trade at a forward P/E of 24.7. Even when factoring-in growth, the stock looks expensive. The shares trade at a PEG ratio of 1.7 — a PEG ratio of less than one indicates that the shares offer growth at a reasonable price.
With this being the case, even though Sanne is growing a lot faster than Softcat, I believe that the latter would make a better investment. Not only is the company cheaper, but it also has a long runway for growth ahead of it. Meanwhile, demand for Sanne’s services might be improving, but this market is becoming more competitive, and the stock’s premium valuation leaves little room for manoeuvre if growth starts to stutter.
