I think this growth stock could explode in 2022!

Dan Appleby is analysing this small-cap growth stock as he sees explosive potential for 2022. Is the market mispricing the shares, and should he buy today?

| 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.

Stack of new bank notes

Image source: Getty Images.

Spectra Systems (LSE: SPSY) is a small-cap growth stock that I’ve followed for a number of years. Recently, the share price has underperformed and is down almost 8% this year alone. However, this does mask a 500%+ return since the end of 2016.

Today, I’m looking at this growth stock again to see if I should buy more shares for my portfolio. Let’s take a closer look.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

The business

Spectra Systems is a leader in providing security technology, including software and advanced materials. Its core revenue generation comes from authentication and processing of banknotes.

Spectra’s banknote authentication technology is top secret as it’s used by global central banks, including two G7 banks. While it authenticates at Level I and II – public level authentication – Level III is the covert one. This has to be unbreakable as it needs to prevent state-sponsored counterfeiting. For example, a foreign country flooding another country’s economy with fake banknotes.

There’s some caution here because of the increase in use of digital payments (not to mention cryptocurrencies). This may impact SPSY’s banknote authentication revenues in the future. However, as the technology is used at Level III authentication, as long as there are any banknotes in circulation then there’s a risk of state-sponsored counterfeiting. It means the firm’s tech will still be required.

The company also offers various other brand security services for a wide range of consumer products and lotteries.

Attractive fundamentals

For being a small-cap growth stock with a pipeline of development opportunities, the company achieves very strong financial numbers. For example, the most recent gross margin was a high 69%, and the operating margin an impressive 36%.

It’s is cash generative, and is able to pay a respectable dividend. The current dividend yield is 4.6%, which I consider attractive considering it’s investing in its development pipeline too.

Recent results show growth stock characteristics

The company released its interim results in September that were in line with the board’s expectations. Revenue grew 23%, and adjusted earnings per share rose by a huge 45%. Cash on the balance sheet increased to $12.8m, which was up from $10.9m. The company is on track to achieve record earnings for the full year.

Since the interim results, it announced that one of its longstanding central bank customers placed a new order as part of another five-year renewal agreement. Based on this renewal, results should now exceed market expectations for the year. The share price has fallen since this release, so I don’t think the market is pricing in the potential for Spectra Systems.

Is this growth stock a buy?

Because of the small size of this growth stock, it flies under the radar of research analysts and institutions, which means it’s hard to get accurate forecasts. It might be considered as higher-risk due to the lack of research on the stock, but I see it as an opportunity. Spectra Systems has recognised the lack of research into the company and recently appointed Allenby Capital to provide extra brokerage and analysis.

I think this growth stock will outperform in 2022 if the market prices the shares correctly for the growth ahead. There’s a risk that rising digital payments limit its banknote authentication business, but SPSY is diversified across other sectors. It’s a buy for my portfolio.

I think this could be another stock to consider...

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Dan Appleby owns shares of Spectra Systems. 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

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

5 ‘no-brainer’ income stocks to buy today!

Amid soaring inflation, I'm looking at these income stocks, offering big yields, to grow my portfolio.

Read more »

Trader on video call from his home office
Investing Articles

How I’d buy the dip in quality UK stocks with £750

Jon Smith explains the concept of buying the dip, and talks through the UK stocks he's going to buy at…

Read more »

Woman looking at a jar of pennies
Investing Articles

5 UK penny shares to buy with £5,000 today

It's hard to remember a time when there were as many tempting penny shares around as now. Here are five…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

The Scottish Mortgage share price keeps falling. Should I buy?

The Scottish Mortgage share price has collapsed from its all-time high in little more than six months. Is it now…

Read more »

UK money in a Jar on a background
Investing Articles

Value investing isn’t dead! My top stocks to buy as inflation hits 9%

As value investing principles come back into fashion, Andrew Mackie looks at the current backdrop and shares what he's investing…

Read more »

Windmills for electric power production.
Investing Articles

Which FTSE 100 shares would I buy to offset higher fuel bills?

Rishi Sunak unveiled a windfall tax this week, hitting shares of energy firms, and especially oil & gas producers. But…

Read more »

Concentrated young african american black guy sitting on heated floor at modern coffee table in living room, looking at laptop screen
Investing Articles

Woodbois shares: should I buy the dip?

Woodbois Ltd (LON: WBI) shares have backtracked from their recent high. Partial to the odd penny stock, Paul Summers considers…

Read more »

Businessman looking at a red arrow crashing through the floor
Investing Articles

Is the stock market crashing?

Markets are proving pretty volatile at the moment so are we headed towards a stock market crash? Dylan Hood takes…

Read more »