Why I think you should stop worrying about the falling FTSE 100 and consider these growth stocks instead

Roland Head explains why he’s ignoring the FTSE 100 (INDEXFTSE:UKX) and focusing on individual stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

If you’re like me and own a selection of hand-picked stocks, then researching potential investment ideas is usually more profitable than trying to follow the movements of a high-profile index.

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.

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.

More on Investing Articles

Investing Articles

Is the Centrica share price a compelling value play?

I'm always on the lookout for investments that might be undervalued, but is the Centrica share price as cheap as…

Read more »

Investing Articles

Down 88% since its peak! Is this one of the best UK shares to buy now?

I see lots of potential shares to buy on the UK stock market right now, but I don't see explosive…

Read more »

Investing Articles

Should investors be looking at the Barclays share price?

The Barclays share price has been in rally mode lately, but is the best still to come for new investors?…

Read more »

Investing Articles

Here’s what Stocks & Shares ISA investors are buying today!

ISA investors are piling into these UK and US stocks. But which could be the best buy right now? Royston…

Read more »

Investing Articles

2 powerful passive income stocks investors should consider snapping up

Building a passive income stream via dividend-paying stocks is possible, according to our writer, who details two picks to take…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing For Beginners

This UK stock has gained 42% since I bought it, but I think it’s still a bargain

Jon Smith outlines his reasons for thinking that a UK stock he owns has the potential to keep rallying for…

Read more »

Investing Articles

1 under-the-radar value stock I’m eyeing up for returns and growth

This Fool is looking for quality stocks at bargain prices and reckons this potentially overlooked value stock could be a…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

National Grid shares have plunged — but if I’d bought 2 years ago, would I be in profit?

National Grid shares are about 22% lower than in May, but that may just be a small blip for long-term…

Read more »