2 growth stocks that could crush the FTSE 100 in 2018

Roland Head takes a look at two high-tech stocks that could rocket ahead of the FTSE 100 (INDEXFTSE:UKX).

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Big investment success stories can sometimes come from unlikely places. Today’s first stock is a good example. Nanoco Group (LSE: NANO) is a high-tech firm specialising in “cadmium-free quantum dots”.

I wasn’t previously familiar with quantum dots. They’re “fluorescent semiconductor nanoparticles” that are typically around 1/1000th the width of a human hair. They absorb energy from light and re-emit the colour in a different colour. They can be used in LCD displays such as computer monitors and televisions to provide vivid, bright colours.

Unfortunately many quantum dots contain cadmium, which is a heavy metal that’s apparently a proven carcinogen. Regulatory pressure to reduce the use of heavy metals in electronics is growing, so Nanoco has focused on developing cadmium-free quantum dots. I’d imagine that demand for this technology could rise rapidly, if it’s commercially successful.

About to hit the big time?

Nanoco published its half-year results this morning. The group reported good progress on several fronts. The company now has “an increasing number of Nanoco-equipped display products moving through to commercial production with customers in Asia”.

The first commercial products using the firm’s technology are expected to reach the market in 2018, so the company could soon start to receive revenue for commercial sales. Analysts expect the group to make a loss of £6.4m on £6.1m of revenue in 2018. In 2019, Nanoco is expected to make a profit of £12.4m on £24.1m of revenue.

To bridge the gap before sales revenue is expected to start flowing, Nanoco completed an £8.6m fundraising in October. Based on the firm’s H1 cash burn of £4.5m, I believe this could be enough to see the business through to break-even.

Should you buy Nanoco?

Consensus forecasts for 2019 put the firm’s shares on a forecast P/E of 15. That seems quite modest, but it’s worth remembering that we don’t yet know how well Nanoco products will sell in the market.

This is too speculative for me, but if you’re comfortable with the risk, I’d continue to hold the shares following today’s figures.

One stock I would buy

I prefer to invest in companies that are already profitable and delivering sustainable growth. One of my favoured stocks in the tech sector is network technology testing and analytics group Spirent Communications (LSE: SPT).

The group’s recent full-year results showed that 2017 was a successful year, despite some customer delays in the US. Adjusted operating profit rose by 27% to $58.9m, while adjusted earnings were 43% higher, at 7.55 cents per share.

Adjusted operating costs were cut by $16.7m, which helped to lift operating margins to 13% and double free cash flow to $56.4m.

Looking ahead at 2018, the outlook remains strong. Consensus forecasts suggest that the group’s earnings will rise by 10% to 8.3 cents per share this year, and then by a further 20% to 10 cents in 2019.

These projections put the stock on a 2018 forecast P/E of 21. The group’s dividend policy suggests to me that a payout of about 4 cents per share is likely this year, giving the stock a forecast yield of around 2.2%.

This isn’t a cheap stock, but it’s one I’d be happy to buy for long-term growth. However, Spirent’s share price has been quite volatile over the last few years. I suspect the best trading strategy here is to buy on the 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 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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