The FTSE 100 index of the UK’s largest publicly-traded companies has fallen by 8% so far this year. But does it really matter? I don’t know about you, but my share portfolio bears very little resemblance to the big-cap index.
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Today, I want to look at two potential buying opportunities for growth investors.
Overlooked and undervalued?
CML Microsystems (LSE: CML) makes semiconductor products, such as flash memory and chips, for wireless data applications. This £78m-cap firm is often overlooked by investors, but has a fairly good track record of growth and profitability.
In a statement today, the company said that profits for the six months to 30 September were in line with expectations. Revenue is expected to clock in at £15m for the half year, with a pre-tax profit of £2.3m.
Net cash was £13.5m at the end of September. That’s almost unchanged from £13.8m in March, despite a £1m dividend payment to shareholders in August.
If we exclude net cash, my sums suggest that CML generated a return on capital employed of almost 13% last year. Operating profit margins also look fairly robust, at about 14%. These aren’t bad figures for a manufacturer, in my view.
The shares currently trade on 18 times 2018/19 forecast earnings, but this multiple falls to a P/E of 15 if we ignore the group’s sizeable cash balance (which doesn’t contribute to profits).
With a dividend yield of 1.8% that’s covered three times by earnings, I think CML could be worth a look for growth investors.
A buying opportunity?
The share price of FTSE 250 firm Electrocomponents (LSE: ECM) has doubled over the last 25 months.
The company — which distributes electronic components through the RS Components and Allied Electronics & Automation brands — is the largest firm of its kind in Europe and the Asia Pacific region. By stocking more than 500,000 products from over 2,500 manufacturers, it’s become a one-stop shop for manufacturers, service operations and many other parts buyers.
I’d normally suggest that a distributor such as Electrocomponents only deserves a modest valuation. But in this case I feel the group’s scale and market share suggest that it has a sustainable advantage, at least in its core European market.
The firm’s profitability seems to support this view. Electrocomponents generated a return on capital employed of 24% last year, with an operating margin of 10%. These impressive figures suggest to me that this could be a high-quality business.
I expect further gains
Three quarters of the group’s profits come from Europe, the Middle East and Africa. I’d imagine that most of these come from Europe — so a recession close to home could hit the firm’s bottom line.
However, there’s no sign of this yet. The group’s latest trading update showed that like-for-like sales rose by 10% during the first half of this year.
Analysts expect Electrocomponents’ adjusted earnings per share to rise by 23% during the 2018/19 financial year, putting the stock on a 2018/19 forecast P/E of 17.5. A 13% dividend increase is expected, giving the shares a prospective dividend yield of 2.5%.
I’d continue to hold and would consider buying on any further weakness.