Tempted by the IQE share price? I’d buy this FTSE 250 growth stock instead

It looks as if the best days are now behind IQE plc (LON: IQE), so it could be time to sell up and buy this FTSE 250 (INDEXFTSE: MCX) growth stock, says Rupert Hargreaves.

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Shares in IQE (LSE: IQE) have had a rough time of late. Last year, the stock lost around two-thirds of its value as earnings and revenue growth failed to live up to expectations and investors jumped ship.

However, since the beginning of 2019, the shares have staged a modest recovery, rising around 2% year-to-date. They were, at one point, up more than 23% for the year. 

These gains seem to suggest that investors are returning to the stock, but I’m not convinced. I think IQE’s future is more uncertain than ever.

Uncertain outlook

Over the past few months, some of the world’s largest computer chip manufacturers, including Nvidia, Micron, CML Microsystem and AMS, have all informed investors they now expect growth for 2019 to come in below expectations. Nvidia, in particular, issued a vast revenue warning at the end of January, lowering its fiscal fourth-quarter outlook to $2.2bn, from $2.7bn.

These developments tell me that the whole semiconductor market is suffering from oversupply and falling demand. It’s logical to assume IQE is having the same problems and, with this being the case, I don’t think investors can trust the City’s numbers when it comes to its future growth. 

Those analysts had been expecting the firm to report earnings per share of 3.9p for fiscal 2019, up 71% from 2018’s estimate of 2.3p. Considering what’s happening in the rest of the semiconductor industry, I reckon IQE will struggle to meet these numbers. And if the enterprise does miss expectations for growth, the share price could crash as it’s currently dealing at a forward P/E of 29.2, a multiple that gives the company no earnings leeway whatsoever. 

Undervalued

At the other end of the valuation spectrum, there’s Amigo Holdings (LSE: AMGO). Amigo provides guarantor loans to borrowers who are unable to borrow from traditional lenders due to poor credit histories. 

Ethical considerations aside, companies like Amigo do provide an essential service. Hundreds of thousands of people in the UK are cut off from traditional banks because of poor credit backgrounds, and Amigo can offer them a lifeline.

From an investor perspective, the business is attractive because it requires almost no capital to set up and generates a relatively attractive profit margin of 35%. The group’s return on capital employed — a measure of profit for every £1 invested in the business — was 10.2% for 2017, putting the business in the top third of the most efficient companies in the UK. 

City analysts expect Amigo’s earnings to more than double over the next two years, rising to 24.8p for fiscal 2020, from 11p as reported for 2017. The group is expected to distribute 5p per share as a dividend for 2019, giving a yield of 2.1%. Current forecasts have the yield doubling in 2020 to 4%. 

What’s more, the stock is also trading at an undemanding forward P/E of just 11.3, which only adds to its appeal. These metrics put Amigo, in my opinion, head and shoulders above IQE as an investment. 

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.

Rupert Hargreaves owns no share 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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