We’d all like to see our investments double in value, wouldn’t we? Here are two that I think stand a good chance of doing that in the coming years.
Shares in EMIS Group (LSE: EMIS) have been behaving a bit weirdly, dropping 25% since a peak in January 2016 to 867p. Had the healthcare software and services specialist been in any trouble I’d understand it, but it’s been putting in steady year-on-year earnings growth, and that looks set to continue.
I suspect it’s the same thing that happens to most popular growth stocks – the share price flies in the early days, and when the initial rapid earnings growth inevitably slows, short-term investors leap off the bandwagon and go seek their next get-rich-quick fix.
In the case of EMIS, 2016 saw adjusted earnings per share rise 9% to 49.4p, and that’s a slowdown from the 15% recorded in 2015 and the double-digit rises of the past five years. But it was ahead of forecasts on a 6% rise in adjusted operating profit, and it enabled the dividend to be lifted by 10% to 23.4p.
Chief executive Chris Spencer did speak of “short term headwinds“, but in the longer term I see EMIS’s technology in greater demand, especially with the recent Wachter Report prioritising the importance of “a fully digitised NHS“.
Forecasts suggest EPS growth of 6% per year for the next two years, but I see that as overly conservative. I’d be surprised to see EPS at less than 100p in 10 years time, and to maintain a P/E of around 15 that would suggest a share price of 1,500p – add in dividends, which are nicely progressive, and that would double an investment made today.
My second pick is perhaps a more obvious growth star: OneSavings Bank (LSE: OSB), whose shares have already climbed 145% since floating in June 2014. The Brexit result caused a bit of a crash, but the price has more than recovered since then, and at 417p the shares are well up on their pre-referendum level.
For 2016, OneSavings has reported a 29% rise in underlying pre-tax profit, to £137m, with its underlying loan book up 20%, and underlying earnings per share up 20% to 41.7p.
The dividend was raised by 21% to 10.5p per share. That’s a yield of only around 2.5%, but forecasts have that rising to 4.1% by 2018 after two more years of predicted earnings rises.
Chief executive Andy Golding said that the bank has “once again met or exceeded all of the financial objectives we set at IPO despite a number of regulatory and tax changes.” He added: “OneSavings Bank is well placed to take advantage of opportunities in our core businesses in 2017 and we remain confident in our ability to generate attractive returns for our shareholders.“
Forecasts put the shares on a P/E of nine for 2018, and that looks way too low to me with the long-term FTSE 100 average being around 14 – especially if OneSavings really does offer dividends in excess of 4% by then.
Brexit uncertainty is surely behind a lot of the apparent undervaluation, and that will be settled in a couple of years. I expect to see banks back to around average P/E valuations in five years at the latest, and I reckon continued EPS growth could easily see OneSavings shares doubled by then.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Emis Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.