Looking for growth? I think this FTSE 250 stock could smash the FTSE 100 over the next decade

Edward Sheldon looks at an exciting FTSE 250 (INDEXFTSE: MCX) growth stock that he believes can outperform the FTSE 100 (INDEXFTSE: UKX) over the long term.

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The FTSE 100 index can be frustrating for investors at times. Look at a long-term chart and you’ll see that currently, it’s trading at around the same level it was at the start of this century. In comparison, the US’s S&P 500 index is currently around 80% higher than it was back at the start of 2000.

If you’re looking to achieve higher returns than the FTSE 100, it can pay to look at investment opportunities outside the top 100 index. There are plenty of exciting mid-cap and small-cap stocks in the UK that have outperformed the FTSE 100 in recent years and look set to continue doing so in the years ahead. Here’s a look at one such growth stock that I believe has the potential to smash the footsie over the long term.

Softcat

Softcat (LSE: SCT) is a leading IT infrastructure company which provides organisations with business intelligence, cloud, data-centre, networking, and security solutions. The stock is a member of the FTSE 250 index and currently has a market capitalisation of £1.3bn.

There’s a lot I like about SCT from an investment perspective. The IT specialist has enjoyed strong revenue and earnings growth in recent years, with its top line rising from £596m in FY2015 to £1,082m for FY2018. Earlier this month, the group reported revenue growth of 30% for the most recent financial year, along with a 37% rise in earnings per share, demonstrating that it has considerable momentum at present.

Other financial metrics stand out as attractive too. For example, Softcat’s return on equity (ROE) is high and has averaged 47% over the last three years. Cash generation is also strong and this has enabled the group to reward shareholders with rapidly rising dividends, which is always a good sign, in my view. Debt is minimal, which is another plus.

Pullback

However, recently, investors have become concerned that growth at Softcat may be slowing down. This is because last month, Chief Executive Graeme Watt advised that while the group was confident of achieving further profitable growth in 2019 and that the first 10 weeks of the year had been “encouraging”, growth wouldn’t match the “exceptional” year it has just had. As a result, the shares have fallen from around 800p at the start of October, to around 650p today. So what should investors make of this fall? Is it a buying opportunity or is the slowing growth a concern?

Long-term buy 

Personally, I see the recent pullback as a buying opportunity for long-term investors. I’ve got the stock on my own watchlist and I’m tempted to begin building a position at current levels.

Of course, we can’t rule out further share price weakness, especially if rival Computacenter’s recent trading update is anything to go by. With so much Brexit uncertainty, growth at Softcat could be a little softer in the short term as firms hold off on IT spending, and this could scare off shorter-term investors.

Yet given the essential IT services it provides, the group looks very well placed to keep growing in the long term, in my opinion.

Currently, the shares trade on a forward-looking P/E ratio of 22 which I don’t think is too expensive, given the group’s long-term growth prospects. That said, if I can buy it cheaper than that if the market wobbles again, I’d be even happier.

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.

Edward Sheldon has no position in any 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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