Gresham Technologies

£136m market cap Gresham Technologies (LSE: GHT) is a software and services company that specialises in providing real-time transaction control and enterprise data integrity solutions to financial services institutions. Its key product Clareti has been designed to assist companies with internal risk management, data governance and regulatory compliance.

Gresham released full-year results for 2017 this morning and the numbers look pretty good. For the year ended 31 December, group revenues increased 26% to £21.7m, easily beating consensus estimates, with revenues from Clareti surging 48% to £11.1m. Adjusted EBITDA rose 34%, while adjusted earnings per share climbed 38% to 6.5p. The company had a cash balance of £8.5m at year-end, up from £7.2m last year.

Management stated that it was confident about the group’s prospects, with CEO Ian Manocha commenting: “With Clareti sales now generating more than half of all Group sales and with the Group now generating surplus cash for the first time in many years, we are confident our strategy is on track and certain about our ability to deliver sustainable long-term profitable growth for our shareholders.”

One thing that stands out to me about today’s results is that the firm has initiated a progressive dividend policy. A final dividend of 0.5p per share was proposed. To my mind, this is a signal of confidence from management and suggests that the outlook for the firm is positive.

Given today’s strong numbers and the dividend initiation, I believe the story here looks exciting. It seems the market agrees with my stance, with the shares up 3% today. This is a stock to watch closely in 2018 and beyond.

Clipper Logistics

Another small-cap worth keeping a close eye on in 2018 is Clipper Logistics (LSE: CLG). Back in late December, I listed CLG as a ‘blockbuster growth stock’ to watch in 2018. However, so far the stock has not lived up to the hype. After an initial run higher in early January to 485p, the shares have fallen by nearly 20%. Yet that has not put me off the growth story.

Clipper provides bespoke logistical services to clients such as John Lewis, New Look and Asda. As such, the company should benefit as the popularity of online shopping increases and consumers become increasingly more impatient. Revenue and profits have grown significantly in recent years, and City analysts expect the growth to continue in the near term. For the year ended 30 April, Clipper’s top line is expected to grow 18%, while net profit is anticipated to climb 20%.

The recent share price decline has lowered Clipper’s forward P/E ratio to 25.6, a valuation which I think is reasonable. A prospective dividend yield of around 2.2% is also on offer. Like Gresham Technologies, this is a stock to watch closely in 2018.

The post Two hot growth stocks to watch closely in 2018 appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Clipper Logistics. 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.

Although both stocks could still be a decent buy at current levels, I believe that the smart thing to do might be to add these to your portfolio during periods of weakness.

Profits up 32%

Fintech stock Gresham Technologies (LSE: GHT) produces software used by banks and financial businesses to help maintain the integrity of their data. Areas of operation include regulatory compliance, risk management and financial controls.

Shares in this £150m group surged 7% higher this morning, after it said 2017 sales are expected to have risen by 24% to £21.3m. Earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to be 32% higher, at £5m.

Both figures are in line with market expectations, but I believe the significance of today’s news is that EBITDA is rising faster than revenue. This implies that the group’s profit margins are continuing to rise. If this continues, profit growth could accelerate.

Don’t get carried away

Of course, it pays to consider the valuation of Gresham stock as well as its growth potential.

The London-based group’s main growth engine is its Clareti software business, where revenue rose by 48% last year. But this isn’t new information. Much of this growth potential is already priced into the shares.

One risk is that City analysts’ 2018 forecasts are surprisingly modest. Sales are expected to be broadly flat, while earnings per share are expected to rise by just 6%. Today’s update didn’t include any change to profit guidance for next year.

Today’s increase has left this stock trading on a 2017 forecast P/E of 33, falling to a P/E of 31 for 2018. In my view, the upside and downside risks are fairly evenly balanced, even if growth remains strong.

Gresham looks like a good business to me, but I’d prefer to wait for a cheaper buying opportunity.

FTSE 100 safety + growth?

How about a financial software stock that combines the stability of a FTSE 100 listing with internet-fuelled growth potential?

Management at Sage Group (LSE: SGE) would like you to believe that their accounting software fits the ticket perfectly. But the size of this business means that achieving strong earnings growth could be more challenging than at a smaller firm.

Sage shares have doubled in just over three years. Over the same period, the group’s reported after-tax profits have risen by around 60%. So the stock has got more expensive, because the price has risen faster than earnings.

But in fairness to the group’s management, if Sage hits forecasts for a full-year profit of £360m in 2017/18, this £8.7bn group will have doubled its profits in four years. That’s a fairly impressive achievement for a company of this size, in my view.

It’s for this reason that I’m attracted to Sage. The group’s operating margin of 20% and strong cash generation mean that management has been able to maintain dividend growth of 8% per year in recent years.

The stock is a little too pricey for me, on 24 times 2018 forecast earnings. But I am tempted and would certainly consider buying on any dips.

The post This FTSE 100 double-bagger isn’t the only stock I’d buy on the dips appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

Growth potential

Reporting on Wednesday was software and services company Gresham Technologies (LSE: GHT). It announced a rise in revenue of 26% compared to the first half of the previous year. Within this figure, total Clareti revenue is 52% higher. This includes the contribution from recently acquired C24 Technologies. Clareti software revenues were up 136% versus the same period of the prior year, which means adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) will be strongly ahead of the prior year.

During the first half of the year, the company signed eight new CTC clients across a wide range of industry segments and geographies. This should help to improve the diversity of the business, thereby reducing its overall risk profile. Given that the company continues to trade in line with previous guidance, its outlook remains relatively upbeat.

Looking ahead, Gresham Technologies is forecast to increase its earnings by 27% in the current year. This growth rate is around four times that of the wider index, and suggests that investor sentiment may improve as the year goes by. With a price-to-earnings growth (PEG) ratio of just 1, the company appears to be undervalued given its outlook. As such, now could prove to be a buying opportunity.

A return to profitability

Also offering investment potential within the IT sector is Redcentric (LSE: RCN). The supplier of IT managed services has posted two consecutive years of pre-tax losses, but is now expected to return to profitability in the current year. This has the potential to provide a boost to market sentiment, which could push the company’s share price higher after its decline of 51% in the last year.

Looking ahead to next year, the company is forecast to report a rise in its bottom line of 17%. This puts its shares on a PEG ratio of 0.8, which indicates there is upside potential. Certainly, there is scope for a downgrade to its forecasts as it transitions from loss to profit, but with a relatively wide margin of safety it could prove to be a sound long-term buy.

Furthermore, Redcentric is expected to recommence dividend payments next year. Although the company has a forward yield of just 0.6%, dividends are due to be covered almost 10 times by profit. This suggests they could rise rapidly, while the payment of a dividend also suggests the company’s management has confidence in its long-term outlook.

The post 2 cheap growth stocks I’d buy in July appeared first on The Motley Fool UK.

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Peter Stephens has no position in any 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.