Just because a share price has risen sharply does not mean it is worth avoiding. Clearly, its margin of safety may not be quite as wide as it once was, and there may be less upside potential than there previously was. However, with the FTSE 100 near a record high, there could still be a number of stocks which offer strong capital growth potential. Here are two prime examples which could be worth buying right now.
Reporting on Friday was defence and aerospace company Rolls-Royce (LSE: RR). It announced that its business units are performing as expected ahead of its results for the first half of the year. Its strategy seems to be working well, with the company on track to deliver improving financial performance over the medium term. For example, its focus on increased production, as well as cost-cutting, could have a positive effect on margins and lead to a rising bottom line in future.
In fact, Rolls-Royce is forecast to report a rise in its net profit of 28% in the next financial year. Given that the FTSE 100’s growth rate is typically in the mid-to-high single-digits each year, this means that the company could be growing at a rate which is four times that of the wider index.
Despite this, it trades on a relatively enticing valuation – even after its share price rise of 36% since the start of the year. It has a price-to-earnings growth (PEG) ratio of only 0.8. For a blue-chip share with a diverse business model, this seems to be a very low price to pay. With spending on defence likely to rise across the globe as the developed world exits austerity programmes, now could be a prudent time to buy Rolls-Royce for the long term.
Also offering a bright outlook is vehicle tracking specialist, Quartix (LSE: QTX). It has experienced an impressive recent period, with the company recording two successive years of double-digit earnings growth. In fact, its net profit has risen at an annualised rate of 22.5% between 2014 and 2016, with more growth expected to be reported next year.
Quartix is forecast to report a rise in its bottom line of 14% in the next financial year. Although it trades on a price-to-earnings (P/E) ratio of 32.6, it could offer share price gains even after its shares have soared by 19% in the last six months. The company’s current strategy seems to be working well, and this could lead to a fast-rising and more consistent earnings growth outlook over the medium term.
Furthermore, Quartix could become a highly desirable income stock. At the present time it yields 3.3%, which is 40 basis points ahead of inflation. With the potential for a higher level of profitability in future, dividends per share could rise significantly and make the stock relatively appealing from an income perspective. This could catalyse its capital growth prospects, as investor demand for income shares may rise due to higher inflation.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Quartix. 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.