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I tipped IQE plc as a stock to watch in January, but wouldn’t buy it now

Shares in semiconductor wafer manufacturer IQE (LSE: IQE) have been getting plenty of attention recently, and that’s no surprise, as the stock has soared from under 40p to over 130p this year, a gain of over 225%.

I actually identified IQE as a stock to watch back in mid-January, in my article 2 cheap technology small-caps for 2017. The company had released a strong trading statement in December, and on a P/E ratio of under 14, the valuation looked appealing. I commented that “the company still looks attractively valued at the current price and it would not surprise me to see the share price run further this year.

Strong momentum 

Well the share price certainly has run further this year, for several reasons. The company released strong final results in March, followed by an upbeat trading statement on 20 July in which it stated that “overall wafer sales are expected to grow by c.16% against H1 2016″ and that “the Group has multiple high growth opportunities ahead.”

Moreover, rumours that IQE technology will be featured in the soon to be released Apple iPhone 8 have clearly boosted demand for the stock. A deal with Apple could be a game changer for the company, however, no formal announcement has been made yet. 

So with this fast-growing technology stock ‘triple-bagging’ this year, is it too late to buy now?

While IQE no doubt looks like an exciting company, personally, I’d be a little hesitant about jumping on board the stock now. A look at the three-year chart shows that the share price has risen in an exponential fashion in recent months, and with City analysts forecasting earnings of 3.27p per share for FY2017, the stock is trading on a lofty forward looking P/E ratio of 40 at present.

While high-quality small-caps do often trade at higher valuations than their slower-moving larger peers, a valuation of that magnitude leaves little margin for error. In other words, if the company misses analysts’ expectations, investors can get their fingers burnt.

So I’m going to continue to watch IQE from the sidelines for now. The company looks very interesting, however, the valuation is a little too high for my liking at the moment.

A more reasonable valuation 

One small-cap that does look attractively valued, in my opinion, is Restore (LSE: RST). The £550m market cap company provides services to offices and workplaces in the private and public sectors, specialising in document storage, document shredding, and workplace and IT relocation.

Restore has grown quickly in recent years, through both organic expansion and acquisitions, and revenues have climbed from £54m in FY2013 to £129m last year. Analysts forecast revenue of £169m this year and earnings of 21.1p per share, which at the current share price, places the stock on a more reasonable forward P/E ratio of 23.5.

Restore has paid out an increasing dividend for the last five years, and while the yield isn’t high at just 0.8%, dividend growth of 300% over the last half decade is impressive. This is a sign that the company is profitable, generating cash, and in sufficient financial health to return excess cash to shareholders.

The stock has been a good performer this year, rising approximately 25%, however I believe there could be more upside to come over the medium-to-long term.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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