As markets surge towards new highs, finding stocks cheap enough to buy and hold is getting tougher. But by focusing on high quality companies with a strong record of growth, I believe I’ve found a couple of potential buying opportunities.
You’re already a customer
You probably use at least one Victrex (LSE: VCT) product without realising it. This chemicals group was spun out of ICI in 1993, since when sales have grown from £30m to more than £290m.
The company now makes speciality polymers such as plastics and resins for a wide range of industrial customers. For example, more than 1bn smartphones and 200m cars contain Victrex products.
Still growing fast
Today’s half-year results show that impressive growth is continuing. Group sales rose by 21% to 2,256 tonnes during the six months to 31 March, driving a 27% increase in revenue to £166.6m.
Profits were up too. The group’s pre-tax profit climbed 26% to £63.3m, compared to the same period last year. Earnings per share rose by 39% to 64.7p and shareholders will get a 10% pay rise as the interim dividend will be increased to 13.4p per share.
All of this sounds positive to me. So why did the shares fall by nearly 5% shortly after the markets opened?
This could be why
In today’s results, chief executive Jakob Sigurdsson warned that favourable exchange rate movements are expected to boost profits by £10m this year. This tailwind is likely to reverse next year, slowing earnings growth.
Half-year earnings also received a one-off boost from the UK’s new Patent Box legislation, which has reduced the effective tax rates for innovative firms such as Victrex.
I’d still buy
I don’t see these factors as a serious concern. Exchange rates usually balance out over the long term, and Victrex remains a fantastically profitable business.
The group’s operating margin was 38% during the first half, which is outstanding. Net cash of £91.8m was also ahead of the same point last year, despite the firm paying out £94m of dividends over the last 12 months.
Analysts expect another special dividend in 2018 and are forecasting a total payout of 121.9p per share, giving the stock a forecast yield of 4.5%.
Although the shares look pricey on 20 times 2018 forecast earnings, I believe the quality and profitability of this business justifies the price tag. I’d keep buying and would plan to hold this stock forever.
Another FTSE 250 contender?
Another potential choice from the chemicals sector is Synthomer (LSE: SYNT). This company also supplies specialist polymers, but serves different markets, including floor coverings, medical latex and various protective coatings.
The Synthomer share price has risen by 162% over the last five years, highlighting the long-term growth potential of this business.
A step change?
The group expanded its production capacity significantly last year and also made bolt-on acquisitions that should help to add new business in key sectors such as packaging. Analysts expect the group’s adjusted earnings to rise by 6% to 32.4p per share this year, putting the stock on a forecast P/E of 15.4, with a prospective yield of 2.6%.
In my view this looks a fair valuation for a long-term growth business. I’d continue to rate the shares as a buy at this level.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Victrex. 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.