Global stock markets have had a good run since April. As a result, a lot of growth stocks now look fully valued. There’s still value to be found in this area of the market however, if we peak beneath the surface. Here’s a look at a UK growth stock that City analysts believe could turn £2k into more than £3k over the next 12 months, or so.
An under-the-radar FTSE 250 stock
The stock I’m going to zoom in on today is Gamma Communications (LSE: GAMA). It’s a provider of tech-focused business communication solutions that operates in the UK and Europe.
Listed on the London Stock Exchange’s main market (after a recent promotion from the AIM), it’s a member of the FTSE 250 index. It currently trades for 1,078p and has a market-cap of £986m.
Analysts expect big gains
Looking at price targets here, analysts seem to be very bullish on this stock. Currently, the average target’s 1,663p, which is 54% higher than the current share price.
If that was to be hit, a £2,000 investment today would grow to about £3,085, ignoring trading commissions. Meanwhile, a £5,000 investment would grow to about £7,700.
It’s worth pointing out that the highest price target within the City is 1,940p. That price – which is around 80% higher than the current share price – is from analysts at Deutsche Bank.
All of these price targets need to be taken with a grain of salt however. Often, forecasts turn out to be wrong and there’s absolutely no guarantee that Gamma shares will rise to these levels.
I’m bullish too
I’m an investor in Gamma though. And I do see the potential for 1,663p in the medium term. To my mind, this stock’s extremely undervalued. Currently, it trades on a price-to-earnings (P/E) ratio of just 11.6. That P/E ratio is below the UK market average. And I don’t think the discount to the market here’s justified.
This is a company that’s growing at a healthy rate as businesses move to digitalise their communications (and it expands into Europe). This year, revenue is forecast to increase 13%.
“I look forward with confidence given the medium-term market opportunity.”
Gamma CEO Andrew Belshaw in March
It’s also a company with a really consistent track record. Over the last decade, revenues have grown every single year. Additionally, it’s very profitable. Over the last five years, return on capital employed has averaged 22%, which is excellent.
On top of this, it has a solid balance sheet, pays regular dividends (the yield’s about 2% and growing rapidly), and it’s doing share buybacks (which could boost earnings per share).
Put all this together and it doesn’t make sense that it’s trading so cheaply, in my view.
Worth a look?
Of course, there are risks here. One is the economic weakness in the UK, hampering growth at present and could continue to do so. Another is the company’s expansion into Europe (and the integration of recent European acquisitions). There’s no guarantee this will pay off.
I believe this stock has a lot of potential however. I think investors should consider it today.
