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2 exciting growth stocks with great long-term potential

Computer security specialist Sophos (LSE: SOPH) has been a success story for growth investors with a 79% share price rise since flotation in July 2015 — with the bulk of that coming in the last couple of months.

Full-year results released on Wednesday show what the excitement is all about, with better-than-expected figures pushing the share price up more than 10% in morning trading. Billings during the year (that is, invoiced sales but not revenue) rose by 18.2%, despite the Brexit-led fall in the pound. 

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The company reported an adjusted operating profit of $38.3m, which was lower than the previous year but still ahead of expectations, and it saw free cash flow almost trebling to $133.4m. But this year’s figures aren’t really what it’s about — after all, adjusted earnings per share of 8.5 cents (approx 6.6p) puts the shares on a P/E of 62.

Sparkling expectations

No, it’s the future that people are investing for, with Sophos reckoning it can reach annual billings of around $1bn by the year 2020, with operating profit of more than $100m. On that basis, we could see a P/E multiple of around 20 or lower, which would be a lot less scary.

But I’m just a little cautious at the moment as I can’t help feeling I’m seeing a bandwagon effect on the share price from last week’s massive cyber-attack that hit the NHS. Computer security spending is expected to rise as a result, and Sophos does supply security systems to the NHS — but I can see investors drifting away as the panic subsides.

Overall, I’m seeing a good company with a great future here, but with perhaps something of a short-term overvaluation. I’d consider buying on any future dips. 

Revamped growth

B2B events organiser UBM (LSE: UBM) is a very different proposition. The company largely reshaped itself in 2016, disposing of its PR Newswire business for £490m (of which £243.7m was paid out as a special dividend), and acquiring Allworld Exhibitions for £392.9m.

That made comparisons with previous years tricky, but UBM did record a 19.2% rise in adjusted operating profit from continuing operations, with diluted earnings per share (again from continuing operations) up 31%. Free cash flow looked strong with an impressive cash conversion rate of 96%.

Forecasts for 2017 currently suggest a further 26% rise in EPS, putting the 707p shares on a forward P/E of 14. With that level of expected growth, I see that as an attractive valuation, especially with dividends of around 3.2% on the cards.

Good start to 2017

Wednesday’s trading update assured us that things are going well, with a full-year outlook that’s unchanged. The company did admit that its spring fashion events had been “mixed“, but stressed that its “focus remains on accelerating organic growth and driving further margin improvement.

But I do pause for thought a little when I see the modest 2% EPS rise pencilled-in for 2018, and I think a year of no real growth like that could knock the share price back. I’m in this investing lark for the long term, but the markets are fickle and rarely see beyond the end of the current year.

The integration of Allworld is apparently going well, and I really do think we’re seeing a good long-term growth prospect here. But I’m wary of sentiment, and it’s another that I might consider buying on the dips.

Profitable growth

There are growth candidates of all shapes and sizes out there, and the tempting pick uncovered in our Top Growth Share From The Motley Fool report has been raking in the cash for years.

The past five years have brought in double-digit annual earnings growth, and the City's experts are predicting two more years of solid growth ahead of us. On top of that, a progressive dividend policy adds an extra attraction to the mix.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended UBM. 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.