Why I’d sell IQE plc to buy this small-cap growth stock today

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When I last examined IQE (LSE: IQE), I liked the company itself, but I saw the shares as too highly valued to allow for the associated risk. I thought I was looking at the excess of the first phase of a typical growth story, and I remain of that opinion today.

A bearish research note from ShadowFall Capital & Research didn’t instil confidence, but IQE was quick to assert that “the allegations contained within the report are without merit and provide a misleading analysis of the company’s financial position,” adding that the report presented “a fundamental misrepresentation of the profit and cash generation of IQE.

ShadowFall apparently held a short position in IQE and was, therefore, not a disinterested observer. But there is a significant volume of declared short positions in IQE at the moment, of around 9%, which is of concern — though it has fallen back as the share price has receded from its peak.

Familiar story

The biggest negative feeling I get is when I look at the IQE share price chart. The shares climbed steadily until September, fell back a little, but then resumed their upward march to 181p by mid-November. After that, the price dropped all the way back to under 100p before putting in a mini-rally to reach 130p as I write.

Now I know that share price charts don’t determine anything at all, but they often do reflect popular emotional human responses. In this case, early growth enthusiasts frequently push prices up too far, they fall on profit taking, rally again briefly, and then enter a lengthy period of slow decline.

On a forward P/E of 43, IQE could well be in that position now. And though I think there’s healthy earnings growth to come, I see it as already in the share price. I think there’ll be better times to buy IQE to come.

Banking growth

My alternative growth candidate is BGEO Group (LSE: BGEO), big in banking in Georgia. On Wednesday, its subsidiary JSC Galt & Taggart was awarded the Best Investment Bank in Georgia 2018 title by Global Finance — and that’s the fourth consecutive year it’s won that accolade.

You might know little about Georgia, but if you shun BGEO Group because of that then you could be missing a bargain-priced opportunity. Rare in that region, the country seems to be making the transition from washed-out ex-Soviet state to emerging free market beacon with considerable success.

On purchasing power parity, 2016 GDP per capita was estimated at $9,891, which is strong. The country’s economy depends significantly on agriculture, but its services sector is a big contributor and manufacturing industry is growing.

Growth opportunities

BGEO group is serving an economy that grew by 4.8% in 2017, with increasing demand for banking services.

Despite forecasts of 20% EPS growth per year for this year and next, BGEO shares are priced on a forward P/E of only 8.6, dropping as low as 7.3 for 2019. That gives PEG ratios of 0.4 for each of the two years, where 0.7 or less is usually seen as an attractive growth indicator.

On top of that, dividends have been nicely progressive and stand to yield 3.4% this year, and 3.8% next.

Liquidity isn’t as healthy as the big Western banks (though until recently it was pretty poor at those too), but BGEO is working to build it up. I see a long-term bargain.

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Alan Oscroft has no position in any of the 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 us better investors.