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A small-cap growth stock I’d buy ahead of IQE plc

The StatPro Group (LSE: SOG) share price has doubled over the past two years, to 154p, albeit with some ups and downs. A little bit of that came on Thursday, on the back of an upbeat third-quarter update.

The company, which bills itself as a “cloud-based portfolio analysis and asset pricing services provider for the global asset management industry,” says all is in line with expectations. Annualised recurring revenue (ARR) at 30 September was up by 40% to £52.9m, including a contribution from Delta which was acquired in May.

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Cloud-based software

‘Software as a Service’ is by far the biggest contributor to ARR, providing 83% of the total (up from 75% at the same time last year).

With the firm moving all of its software delivery to a cloud-based distribution, operating costs should be about as low as they can get, and that gives me confidence in its ability to generate cash.

The full year is forecast to bring in a 40% rise in earnings per share (EPS), with a further 45% pencilled in for 2018. That’s excellent, but whether to buy all depends on the valuation of the shares — and they look good to me.

P/E multiples of 30, dropping to 21, might seem a bit stretching, but I think they’re within a reasonable range for a growth prospect like this. And that’s supported by PEG ratios of 0.7 this year, falling to 0.5 next — anything around 0.7 or less is enough to excite me.

EPS did fall between 2012 and 2014, and the dividend has been held flat as a result and should yield around 2% this year, but I can see that picking up again in the next few years.

Chips, but not cheap

IQE (LSE: IQE) is a great company, supplying advanced semiconductor wafers made using an advanced crystal growth technology known as epitaxy, to companies fabricating leading-edge chips.

EPS has gone from 1.47p in 2012 to 3.17p by 2016 — and forecasts would see that rising to 3.9p by 2018. But I fear one downside — the typical growth share price spike, which I have seen happen so many times in my investing career.

When a stock like IQE is showing early promise and the share price is starting to pick up, many short-term investors pile in, hoping to make a quick profit. And that so often pushes the shares to early overvaluation, followed by either a sharp crash or a prolonged period in the doldrums.

Five-bagger

IQE shares have more than five-bagged over the past 12 months, to 135p, and those who bought early with a long-term view will be happy with that. But the price is already down from its peak of 160p in September, and those forecasts still give us a P/E multiple of over 40 for this year, dropping only as far as 35 in 2018.

That looks a bit pricey to me right now, and I’m also concerned that IQE is in a fickle business — it’s great at what it does, but so are others in a very competitive market.

Apple is one of IQE’s customers, and hopes that it will supply the new generation of iPhones seem high. But Apple is known for changing suppliers at the drop of a hat, and that’s a risk that should not be overlooked.

I like the company, but I think the shares are too expensive.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.