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Forget IQE, I’d pile into this high-flying growth company right now

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Last year, the share-price action was all up for advanced wafer products manufacturer IQE (LSE: IQE), but during 2018 that progress has been unwinding. Last week’s half-year results didn’t do anything to stop the slide and today, the shares are down again continuing a negative trend that seems to be well bedded in.

Irrational exuberance?

Although the directors remain optimistic about the outlook, we’re not yet seeing the robust revenue and profit advances that are needed to sustain a powerful uptrend in the shares. The reported 4% increase in revenue and more than 50% plunge in post-tax earnings don’t cut it. And there’s no solace in the firm’s recent record on cash generation from operations, which is pedestrian at best. I reckon we saw a bit of irrational exuberance from investors who drove the shares up last year. This year, we are seeing the shorters out in force.

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I wouldn’t buy shares in IQE right now, but I’m interested in what has been a fantastic performance on the stock market from technology-based communications services provider Gamma Communications (LSE: GAMA). Over the last three years the stock is up more than 200%, driven by decent operational progress fuelling rising revenue, earnings and cash flow. During that period the valuation has risen to reflect the resilience of the firm’s emerging growth profile and that’s enhanced the uptrend in the shares. Which just goes to show what can happen when a growth strategy clicks and shows in the financial results. That’s what IQE is missing.

Trading very well indeed

Today’s half-year figures from Gamma Communications continue the good news. Revenue increased a little over 18% compared to the equivalent period a year ago, cash from operations shot up a mighty 66% or so, and adjusted earnings per share moved almost 29% higher. The directors expressed their confidence in the outlook by pushing up the interim dividend nearly 11%. This is what we want, and the share price is up more than 6% today, as I write.

The firm describes itself as a “rapidly growing, technology based, provider of communications services to the business market” and uses its own intellectual property to design and provide services such as Cloud PBX, Inbound Call Control and SIP Trunking, which meet the “increasingly complex” voice, data and mobility requirements of businesses. On top of that, Gamma provides business-grade mobile and data services and has a “substantial” voice service capability.  Much of the firm’s financial success has been driven by monthly repeating revenues, which leads to attractive and stable incoming cash flow.

Looking forward, the directors are “enthusiastic” about the outlook for the rest of 2018 and beyond and growth remains on the agenda. New product launches and ongoing development activity look set to keep the company moving forward and City analysts following the firm predict double-digit advances in earnings for 2018 and 2019 in the low- to mid-teens. I think the firm’s ongoing growth prospects make the stock well worth your research time right now.

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Kevin Godbold 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.

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