The FTSE 100 reshuffle means that some of the shares hit hardest by coronavirus have dropped out of the FTSE 100 . EasyJet, Meggitt and Carnival have left, along with Centrica, which has seemed in decline for years.
Czech cybersecurity firm Avast (LSE: AVST) is one of the companies that has joined the FTSE 100. Operating in the high-growth cybersecurity industry, could the share price now rocket even further?
Can the FTSE 100 reshuffle make Avast rocket?
I think Avast has a number of drivers of its share price for the future. The company also suits a number of investment styles as it has momentum, provides income and has growth potential. Currently, technology is in favour, as shown by companies such as Microsoft hitting new highs. Gaming companies in particular are doing well, as are shares like Ocado. Lockdown has been a boon for the industry.
Avast itself is growing well. Revenues have increased from £653m in 2017 to £871m in 2019. Operating profit over the same period increased by £220m to £344.6m.
The company – unusually for a growth tech stock – pays a dividend. The rising share price has pushed down the yield, but it’s a still-respectable 2.5%. The board has committed to paying the dividend as the company performance hasn’t been too impacted by coronavirus. It hasn’t changed its guidance on the performance it expects during 2020, which is a good sign.
As an additional bonus, the shares could well get a boost from joining the FTSE 100 as more fund manages and trackers have to buy the shares, creating extra demand. I know personally after Ashtead joined the FTSE 100 that the shares did very well. The same thing could happen with Avast.
Isn’t it expensive already?
It’s not particularly expensive, especially when compared to other technology shares. On a P/E of 18, the shares are more expensive than in other industries and the stock market as a whole. But in many ways, this reflects investor optimism about the sector and the growth Avast is achieving.
One other danger besides the valuation is, of course, that its technology gets usurped by something superior. Microsoft, for example, is working on its own offering and the market is very crowded. This is though a challenge which management will be aware of.
Avast does also have quite a lot of debt at $884.5 m, which adds some risk for investors. I don’t believe it has got the strongest balance sheet as current liabilities are also high, but it’s probably been stretched by growth. This race for growth should literally pay dividends down the line, so I’m not too worried.
Avast has elbowed its way into the market and has momentum, provides income and has growth potential, so I think the shares should do well.
Of the new companies that have joined the FTSE 100 during the reshuffle, Avast is the one I’m most optimistic about. I think it has more growth and income potential than Homeserve, GVC (owner of Ladbrokes) and Kingfisher (owner of B&Q).
Andy Ross owns no share mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft. The Motley Fool UK has recommended Carnival, Homeserve, and Meggitt and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.