Growth stocks had a great year in 2016, but 2017 promises to be even better as economic growth remains robust in Europe, the US and the UK. However, it looks as if some sectors are set to benefit more than others throughout the year as trends that emerged during 2016 continue during the next 12 months. Tech is one such sector.
Transformational year
2016 was something of a transformational year for UK tech darling Micro Focus (LSE: MCRO). After receiving several hostile takeover offers, which management quickly rejected, it struck a deal to merge with Hewlett Packard Enterprise in an $8.8bn trnsaction creating one of the largest software firms in Britain by revenue.
The newly expanded company, which will have annual revenues of $4.5bn, will be one of the largest tech companies in the UK and one of the most substantial business software providers in the world. But the merger isn’t expected to complete until the third quarter of 2017, so there’s still a considerable amount of uncertainty surrounding its outlook for the year ahead.
Moreover, City growth projections for when the deal completes are difficult to come by and with this being the case, it’s likely the market is underestimating the enlarged entity’s potential.
Indeed, at the time of writing City analysts are expecting Micro Focus to report earnings per share of 136p for the fiscal year ending 30 April, up 10% year-on-year. Earnings growth of 6% is projected for the year after, which seems to exclude any benefits from the HP acquisition. However, as Micro Focus has a history of successfully integrating bolt-on acquisitions, cutting costs and widening margins, I believe these forecasts substantially underestimate the enlarged company’s potential. What’s more, at present shares in Micro Focus trade at an undemanding forward P/E of 15.9 and yield 2.9%.
In demand
BAE Systems (LSE: BA) is rapidly shaking off its image as a traditional defence contractor as the firm shifts towards cyber security.
Over the past few years, BAE has put a lot of effort into pushing its cyber security tech and these efforts are starting to pay off. At the beginning of 2016, the firm reported revenue at its Applied Intelligence cyber security arm grew 31% during 2015. Growth continued into the first half of 2016 with BAE reporting first-half earnings up 6.1% on the back of rising cyber security earnings as well as higher sales of legacy defence products.
Throughout 2017 that cyber business should continue its rapid growth. The company recently inked a deal with Germany’s top insurer Allianz that will open up potential deals for BAE with companies that have been targeted by cyber criminals. As part of the deal, it will provide Allianz customers with instant access to its cyber defence expertise.
With the demand for BAE’s cyber security offer growing, City analysts are expecting the company to report earnings per share up 9% for 2017. The shares currently trade at a forward P/E of 13.8 for 2017 and support a dividend yield of 3.6%.
