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Two growth monsters I believe could jump 50% or more

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Provider of highly specialised tools for the research and medical industries, Oxford Instruments (LSE: OXIG) is not your average company. This firm began life in a researcher’s garden shed and became the first commercial spin-off of Oxford University in 1959. 

Shares in the company really took off at the beginning of 2010, rising 800% over four years, and the business peaked in 2012 when profits hit £25m. Unfortunately, since then the firm has been grappling with rising competition for its products, which has pushed it to restructure the business. 

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In June of last year, management announced its ‘Horizon Strategy,’ which the company hopes will allow it to return to growth. The strategy is focused around two key “anchors” of returning to sustainable growth and improving margins by “concentrating on market segments with long-term growth drivers where we have the potential to become the market leader.” 

Pushing ahead

According to a trading statement issued by the business today, this strategy seems to be paying off. For the year to 31 March 2018, earnings are expected to be in line with market projections and for fiscal 2019, management is expecting to “see an improvement in performance on a reported basis.” City analysts have pencilled in earnings per share growth of just under 8% for fiscal 2018, followed by a similar rate of growth for 2019. And based on these projections, as well as the company’s progress, I believe shares in Oxford could be worth up to 50% more than they are today.

Specifically, shares in the company are currently trading at a forward P/E of just 14, a high multiple compared to some sectors, but not that dear for a highly specialist technology and research business. Oxford’s peer, Judges Scientific for example, trades at a forward P/E of 17.7 and other non-medical peers such as Renishaw and Gooch & Housego trade at an average forward P/E of 25. If Oxford trades up to the same valuation, the shares could be worth as much as 1,425p, 73% above current levels.

Proving its worth 

Another business that I believe is worth significantly more than the current valuation attributed to it is Plus 500 (LSE: PLUS)

It is something of an anomaly. For as long as I can remember, analysts have been questioning the sustainability of the company’s income, and even the legality of its operations. However, despite these concerns, year after year the firm has produced results for investors. 

So, as the company continues to produce profitable growth, I believe that it is only a matter of time before the market re-rates the stock. Right now shares in the group are trading at a forward P/E of just 8.5, and support a dividend yield of 7.1%, compared to the valuation of 15 times forward earnings for its larger peer, IG Group.

As IG is the sector leader, I believe that it deserves a premium valuation, but even if shares in Plus 500 traded up to 13 times forward earnings, the shares could be worth as much as 2,015p, or 54% above current levels.

That being said, not everyone holds the same view as me. My Foolish colleague G A Chester is avoiding the business because it’s difficult to figure out why it is so much more profitable than its larger peers.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Gooch & Housego, Judges Scientific, and Renishaw. 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.

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