The Motley Fool

Why I think you should stop worrying about the falling FTSE 100 and consider these growth stocks instead

The FTSE 100 index of the UK’s largest publicly-traded companies has fallen by 8% so far this year. But does it really matter? I don’t know about you, but my share portfolio bears very little resemblance to the big-cap index.

If you’re like me and own a selection of hand-picked stocks, then researching potential investment ideas is usually more profitable than trying to follow the movements of a high-profile index.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Today, I want to look at two potential buying opportunities for growth investors.

Overlooked and undervalued?

CML Microsystems (LSE: CML) makes semiconductor products, such as flash memory and chips, for wireless data applications. This £78m-cap firm is often overlooked by investors, but has a fairly good track record of growth and profitability.

In a statement today, the company said that profits for the six months to 30 September were in line with expectations. Revenue is expected to clock in at £15m for the half year, with a pre-tax profit of £2.3m.

Net cash was £13.5m at the end of September. That’s almost unchanged from £13.8m in March, despite a £1m dividend payment to shareholders in August.

If we exclude net cash, my sums suggest that CML generated a return on capital employed of almost 13% last year. Operating profit margins also look fairly robust, at about 14%. These aren’t bad figures for a manufacturer, in my view.

The shares currently trade on 18 times 2018/19 forecast earnings, but this multiple falls to a P/E of 15 if we ignore the group’s sizeable cash balance (which doesn’t contribute to profits).

With a dividend yield of 1.8% that’s covered three times by earnings, I think CML could be worth a look for growth investors.

A buying opportunity?

The share price of FTSE 250 firm Electrocomponents (LSE: ECM) has doubled over the last 25 months.

The company — which distributes electronic components through the RS Components and Allied Electronics & Automation brands — is the largest firm of its kind in Europe and the Asia Pacific region. By stocking more than 500,000 products from over 2,500 manufacturers, it’s become a one-stop shop for manufacturers, service operations and many other parts buyers.

I’d normally suggest that a distributor such as Electrocomponents only deserves a modest valuation. But in this case I feel the group’s scale and market share suggest that it has a sustainable advantage, at least in its core European market.

The firm’s profitability seems to support this view. Electrocomponents generated a return on capital employed of 24% last year, with an operating margin of 10%. These impressive figures suggest to me that this could be a high-quality business.

I expect further gains

Three quarters of the group’s profits come from Europe, the Middle East and Africa. I’d imagine that most of these come from Europe — so a recession close to home could hit the firm’s bottom line.

However, there’s no sign of this yet. The group’s latest trading update showed that like-for-like sales rose by 10% during the first half of this year.

Analysts expect Electrocomponents’ adjusted earnings per share to rise by 23% during the 2018/19 financial year, putting the stock on a 2018/19 forecast P/E of 17.5. A 13% dividend increase is expected, giving the shares a prospective dividend yield of 2.5%.

I’d continue to hold and would consider buying on any further weakness.

Capital Gains

In the meantime, one of our top investing analysts has put together a free report called "A Top Growth Share From The Motley Fool", featuring a mid-cap firm enjoying strong growth that looks set to continue. To find out its name and why we like it for free, click here now!

Roland Head 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.