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D4t4 Solutions plc is a cheap growth stock I’d buy after it gains 25%

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Data solutions provider D4t4 (LSE: D4T4) recorded a stock price rise of over 25% on Tuesday after it released details of a trading update. The company has won a number of new contracts which are expected to have a positive impact on its financial performance in the second half of the year. This seems to have galvanised investor sentiment and helped to push the company’s valuation higher.

Despite this, there still seems to be further upside potential on offer. As such, now could be the perfect time to buy it for the long run.

Impressive outlook

D4t4’s performance in the latter part of the financial year to 31 March has been better than expected. It has won a handful of contracts which have boosted its performance, including its two largest ever contracts for the Private Cloud Analytics solution. This means that it has delivered a record level of bookings for the year after what was a relatively subdued first half. As a result, revenue and adjusted profit before tax for the 2018 financial year are due to be ahead of the previous year.

In the current year, D4t4 expects to benefit from the recent contract wins. It’s due to report a 13% rise in its bottom line which puts it on a price-to-earnings growth (PEG) ratio of just 0.7. This suggests that it could offer further upside potential – especially if it’s able to continue recent momentum with regards to contract wins.

And while its share price may have risen significantly in a short space of time, now could be the right time to buy it. A dividend yield of 2.1% from a payout which is covered 4.2 times by profit indicates that its total returns could be resiliently high. As such, its risk/reward ratio is enticing at the present time.

Upbeat prospects

Also offering upbeat capital growth prospects within the software and computer services sector is Sophos (LSE: SOPH). The IT security products specialist is expected to deliver a significant improvement in its financial performance over the next couple of years, with its bottom line forecast to rise by 96% in the current year, and by a further 62% next year.

This has the potential to cause a step-change in investor sentiment towards the company. In the last six months, its share price has fallen by around 20% and this means that it now trades on a PEG ratio of around 1. Given its size and the diverse nature of its business, this appears to be a relatively low valuation.

Certainly, Sophos may appear to be highly-valued due to it having a price-to-earnings (P/E) ratio of around 96. However, if it’s able to deliver on its forecasts then it may be able to reverse recent disappointment from an investment perspective. As such, with strong turnaround potential, now could be the perfect time to buy.

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Peter Stephens 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.