But this latest increase is nothing compared to the astonishing increase of 522% seen over the past year. Now, many stocks have doubled their share price in this time, because prices were abnormally low last year, thanks to the rapidly spreading pandemic. But an over sixfold increase is a bit of a feat. 

An AIM stock with a meteoric rise

Like many other coronavirus impacted stocks, Gattaca too started making gains in November last year. A poor economy is bad news for recruiters, which thrive on booms that create a lot of job opportunities. Within a month of the stock market rally, its share price had doubled.

Since then, its updates have also added consistently to investor optimism, pushing its share price further up. In its latest trading update for the financial year ending 31 July 2021, the company said that recovery has been better than it expected earlier. It was also optimistic about the future. It expects that its recovery will continue and also that its pre-tax profits will be “significantly ahead of market expectations”. In the days that followed this update, the Gattaca share price rose sharply again. Within one month of it, its share price had increased some four times. 

It is now trading at multi-year highs. Going by the fact that the economy is expected to pick up speed now, I reckon that its optimism is well placed. And that this provider of engineering and technology recruitments can continue to make gains in the future as well. 

More reasons to like Gattaca

There are two other reasons to like the stock. One, it has a diversified presence across countries including the US and Spain. Its presence in large economies indicates much scope for further growth. It is also a positive at a time when the pandemic is creating uneven recovery across countries. Two, it will also start paying dividends again. The amount remains to be seen, but it is a nice top-up for a growth stock anyway. 

The downside

There are drawbacks to this AIM stock as well though. For instance, it has incurred a net loss for the last three years, which also explains why its share price tumbled from all-time highs in the past few years. Further, recruitments are a cyclical business. Gattaca itself was impacted by the Brexit vote a few years ago. This means that if the economy does not quite take off the way we hope right now, it could be in for another year of losses. And its share price has already run up significantly in the past year. 

Would I buy the Gattaca share?

While it is possible for Gattaca to turn around, I would wait for some more proof of this. If it had just had a pandemic wobble, I would be far more bullish. But its continued struggle to be profitable makes me cautious. However, it is on my watchlist because of its potential.

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The best dividend stocks have high-profit margins and strong balance sheets, which are precisely the traits that Galliford Try (LSE: GFRD) offers. 

Cash cow

Over the past five years, Galliford has reaped the benefits from the UK housing boom. For the fiscal year ending 30 June 2018, City analysts are expecting the company to report earnings per share of 167p, up 135% from the 71p per share reported for fiscal 2013. 

As Galliford’s earnings have grown, so has the company’s dividend distribution to investors. Over the past five years, the firm’s dividend has expanded by 164%, and according to current City forecasts, next year the shares are set to support a dividend yield of 8.1% — this payout will be covered 1.5 times by earnings per share. 

For the financial year ending 30 June 2017, Galliford generated over £100m of cash from operations, which was more than enough to cover the firm’s total dividend payout of £73m. I believe that this will be the case for 2018 as well. And even if the firm’s earnings start to fall, the group’s balance sheet looks healthy with a net cash balance of £7.2m. 

Devoted to shareholder returns 

As well as Galliford, I believe that recruitment firm Gattaca (LSE: GATC) could be a great income buy for your portfolio. 

Shares in Gattaca currently support a dividend yield of 7.6% and trade at a forward P/E of 8.4. City analysts are expecting the firm to report earnings growth of 49% this year, so not only does the company look like a great yield play, but it also offers growth at a reasonable price. 

Gattaca’s balance sheet is weaker than that of Galliford with net debt at the end of fiscal 2017 (31 July) standing at £40m. However, the company is throwing off enough cash to maintain its dividend and keep debt under control. Over the past five years, the firm has generated on average £10.8m per annum from operations. Capital spending is minimal, so almost all of this cash is available for paying the dividend, which cost a total of £7.2m last year. 

To help grow earnings, Gattaca is trying to diversify overseas. This strategy has yet to pay dividends, but over the next few years, the group should start to see the results of its diversification strategy (although my Foolish colleague Royston Wild seems to disagree). International business still accounts for just 20% of group net fee income. As growth unfolds, it’s likely the company’s dividend payout will grow as well. 

So, if you’re looking for a high-single-digit dividend yield with room for further growth, Gattaca seems to me to tick all the income boxes. 

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The specialist recruiter advised that revenues rose 4% in the 12 months to July, to £642.4m, while net fee income (NFI) advanced 2% to £74.7m. But this could not push earnings higher at the business — indeed, pre-tax profit ducked by a painful 24% year-on-year to £11.5m.

Gattaca advised that NFI at its UK Engineering operations reversed 3% in the period while at its UK Technology arm these fell 6%. And thanks to contract reductions in South Africa, NFI for its International division dropped 4% year-on-year.

Trouble at home

The Fareham business said, however, that it has seen conditions improve more recently at UK Engineering and International. At its core UK Engineering arm it said that “exit rates for fiscal 2017 indicated that the decline in those markets was abating” with quarter four NFI down just 1%.

The City is expecting earnings to bounce 55% in fiscal 2018 as recent investments pay off, and this leaves the business trading on an ultra-cheap forward P/E multiple of 8.4 times. A projected 23p per share dividend creates a market-smashing yield of 7.5%.          

But any chances of a solid recovery from the current year remain less than assured, in my opinion, given that tough trading conditions in the UK look set to remain. Indeed, Gattaca said that its UK Technology arm “continued to face challenges in quarter four, especially Telecoms where gains in new markets such as converging telecoms were not sufficient to offset lower demand for our network infrastructure market.”                            

Given the possibility of sustained economic and political strife in the UK (from where Gattaca sources 80% of group NFI), the recruiter carries too much risk for me to be happy with, even at current prices.

Bargain builder

I would be much happier to plough my hard-earned cash into Bellway (LSE: BWY) right now, and particularly given its very-compelling valuations.

I myself own shares in Britain’s housebuilders, holdings in Barratt Developments and Taylor Wimpey forming a cornerstone of my own investment portfolio. I always buy on the basis of holding a share for a minimum of five years and, with Britain’s painful housing shortage still not being properly addressed by government, I am convinced the likes of Bellway should remain formidable earnings generators for some time yet.

Against this backcloth, the City expects Bellway to print earnings expansion of 12% in the year to July 2018, a figure that creates a bargain forward P/E ratio of 8.3 times as well as a mega-low sub-1 PEG reading of 0.7.

And the FTSE 250 firm’s bright profits outlook and strong cash generation (it had £16m in cash on its balance sheet and no debt as of July) should keep driving dividends higher, too. Last year’s 122p per share reward is expected to step to 135.7p in fiscal 2018, resulting in a chunky yield of 3.8%.

I reckon Bellway is in much better shape than Gattaca to deliver sustained profits and dividend growth in the years ahead.

The post Why I’d sell this share despite its 7.5% yield appeared first on The Motley Fool UK.

However, I believe this weakness represents a fresh buying opportunity for share pickers to pile back into National Grid. Speculation over a regulatory shake-up in the electricity industry is never likely to go away. But government appetite to revolutionise the sector can be considered lukewarm at best, as evidenced by the Conservatives’ decision to backpedal on their pledge to cap prices should they win June’s general election.

Big yields

No-one would claim that National Grid has what it takes to generate electrifying earnings growth in the coming years.

But therein lies its beauty. While power provision is hardly the most exciting game in town, the dependable nature of electricity demand gives the company the sort of earnings visibility most other London-quoted stocks can only dream of. And this is a particularly critical quality as Britain’s economy looks set to cool.

National Grid is expected to generate earnings growth of 9% in the year to March 2018, and a further 2% rise is forecast for the following year. So unsurprisingly, the City expects dividends to move higher too — a 45.5p per share payout is forecast for this year, a figure that yields a brilliant 4.8%.

And the 46.9p dividend forecast for fiscal 2019 drives the yield to a delicious 4.9%.

Political peril

By contrast, those seeking abundant income flows would do best to avoid Gattaca (LSE: GATC), in my opinion.

Why so? After all, City analysts are expecting the staffing play to keep the dividend locked at 23p per share for the year to July 2017, and to maintain rewards at this level in the current fiscal period. And such a projection creates a whopping 8.2% yield.

Well, the pressures created by the intensifying political and economic pressures in Britain would encourage me to give Gattaca a wide berth despite these whopping forecasts.

The engineering and technology recruitment specialist has seen its stock value descend 9% in Thursday trading after chief executive Brian Wilkinson said: “The UK continues to be our biggest market by some margin and, while we have seen some recovery following the initial uncertainty caused by the outcome of the EU referendum, continuing political uncertainty and its impact on business confidence is unlikely to lead to an increase in customer demand and candidate availability in the near and medium term.”

Gattaca advised that overall net fee income (or NFI) slipped 4% as uncertainties created by Brexit negotiations and June’s general election, allied with tax changes, hampered business confidence. It saw engineering NFI fall 3% from fiscal 2016, while technology NFI slipped by 6%.

City brokers had been predicting earnings rises of 8% last year and 18% this year, but these projections are likely to receive vast downgrades following today’s worrying update. And with conditions set to remain pretty difficult for some time yet, I reckon the company carries too much risk right now.

The post Why I’d buy National Grid plc over this high-risk dividend share appeared first on The Motley Fool UK.

Today I’m looking at full-year results from IMImobile (LSE: IMO). 

What we saw from these was a 19% boost for operating profit to £4.9m, provided by a 24% rise in revenue to £76.1m. Operational cash generation of £11.9m with a cash conversion factor of 104% suggest the firm is producing the actual hard stuff in good measure — and even after the £5.5m cost of acquiring Infracast, IMImobile was left with £14.7m in cash on the books.

Unfulfilled need

Chief executive Jay Patel said: “There continues to be an overwhelming need for companies such as banks, mobile operators, retailers, utilities and major brands to invest in improving customer experience, predominantly through digital channels.” Surely every one of us is painfully aware of that need and can think of at least one example of a big company reacting to problems with a woefully incompetent approach to social media.

Mr Patel went on to say: “We will continue to invest further in marketing and product development to establish a leading position in this growth market.“

This year, adjusted earnings per share came in 6% ahead at 11p, for a P/E multiple of 19, and with modest rises forecast for the next couple of years, I’m quite happy with that. 

Fundamental ratios don’t matter so much with companies at this stage of their life as long as they don’t get crazy, and IMImobile is best evaluated on the subjective nature of its business. I see it as a risky but attractive proposition.

Picks and shovels

Turning to a company offering services to the technology industry, I’m drawn to Gattaca (LSE: GATC), a specialist engineering and technology recruitment business — firms like these can do well whichever leading-edge tech companies they serve.

I’m particularly intrigued by Gattaca’s earnings growth record, its further growth forecasts, and its impressive dividend prospects.

Despite a drop in 2016, EPS has risen by 32% between 2o12 and 2016, and forecasts for the next two years would see further growth of 27% by July 2018.

On top of that, the dividend has soared from 15.6p per share in 2012 to 23p last year, and though it’s expected to remain flat this year, we’d still see a yield of 7.6% on today’s 302.5p share price.

Shares look cheap

In P/E terms, we’re looking at a forward multiple of under 10, dropping to a bit over eight on 2018’s EPS growth forecasts, so are there any negatives? 

Well, a trading update in April suggested that profits for the full year would be approximately 10%-15% below prior expectations. Weaker trading conditions in the post-Brexit era were partially blamed, as were a few one-off cost overruns — and I’m a little disturbed by the effects of that apparently not having been seen sooner.

But recruitment is very much a cyclical business, and a modest short-term underperformance is not unexpected. I’m a little cautious, but I feel the sector has a strong long-term future, and I can’t help seeing the current share price weakness as a buying opportunity.

The post Two bargain stocks with great growth potential appeared first on The Motley Fool UK.

Does that mean the new share price offers better value for investors or is the drop a warning sign that we should keep away?

Rising costs and delayed savings

The negative in the update is that the directors expect full-year profits for the year to 31 July to be 10%-15% below its prior expectations. There was no mention of missing expectations in the firm’s trading update for the six months to 31 January, which Gattaca delivered on 2 February, so I’m assuming that trouble emerged since then, suggesting a rapid deterioration, or maybe a sudden ‘realisation’.

The directors say that tougher UK trading conditions affected first-half performance after the Brexit vote, driven by “near-term uncertainty which led to elongated hiring decisions and some projects being delayed.”  However, that was known back in February. The new information is that costs have ballooned as the firm invests for growth and administration cost savings that were expected have been “delayed”.

The directors remain optimistic about the medium-term outlook, saying there are “some signs of a return of confidence in recent weeks.”

What kind of beast is Gattaca?

Recruitment firms are cyclical, and Gattaca’s shares are down about 57% from a peak of around 632p achieved during April 2014. Meanwhile, the price-to-earnings (P/E) ratio runs just over a low-looking seven or so.

When cyclical firms have low P/E ratings after a period of buoyant macroeconomic activity, it can often serve as a warning to investors that difficult trading could be on the way. I consider the shares to be dangerous right now, so I’m avoiding, rather than fighting the trend by buying.

Meanwhile, high technology tools and systems provider Oxford Instruments’ (LSE: OXIG) update today suggests the firm could be a better buy than Gattaca.

Growth expected

The company reckons its full-year results to 31 March will come in flat, so no earnings growth compared to the year before, but no decline either. The outcome conceals a varied result from operations with strong performance from the NanoTechnology Tools division offsetting a deterioration in OI Healthcare.

City analysts following the firm expect earnings to advance 14% for the year to March 2018 and 5% the following year. The expectation of growth is on the table and Oxford Instruments occupies a specialist niche in the market, which strikes me as a better basis for an investment than the conditions we see at Gattaca now.

I think it is a good idea to keep an eye on the firm’s debt levels. The company says it has reduced net debt but gives no figures. The last available balance sheet showed net debt running at almost six times the level of annual operating profit, which is on the high side, but the directors are focusing on bringing it down.

At a share price of 850p, the forward P/E ratio runs at just over 14 for the year to March 2019, which seems fair.

The post Is Gattaca plc a falling knife to catch after dropping 10% today? appeared first on The Motley Fool UK.

Bargain stocks like this are more common among smaller companies, where analyst coverage is patchy. Today, I’m going to look at two small cap stocks with 7% yields and — in my view — the potential for big gains.

This sell-off has gone too far

Shares of recruitment group Gattaca (LSE: GATC) — formerly known as MatchTech — have fallen by 34% over the last year. Investors have stayed away from this sector since the referendum due to fears that Brexit could trigger a recession.

There’s no way to know what might happen in two years. But the evidence so far suggests that demand from the engineering and technology sectors in which Gattaca specialises remains strong.

In its latest trading update, the company said that “vacancy flow is increasing” after a slow period following the referendum. Although the group’s net fee income fell by 5% to £35.1m during the first half, this was apparently due to “elongated hiring decisions”, not a slump in demand.

The board expects profits for the year ending 31 July to be in line with expectations. Forecasts from the firm’s house broker suggest that this will mean earnings of 39.9p per share, together with a dividend of 23.3p per share. That puts the stock on a tempting P/E of 7.9, with a prospective yield of 7.4%.

For what it’s worth, forecasts for 2017/18 show further growth. But a lot could change before then. I’m more attracted to Gattaca’s low debt levels and its historically strong free cash flow.

These, plus the stock’s modest valuation, suggest to me that the dividend should be sustainable. If I’m right, I’d expect the shares to move significantly higher at some point.

An alternative property stock

If you’re not sure about UK property stocks, Barbados-focused luxury hotel group Elegant Hotels Group (LSE: EHG) could be an interesting alternative.

The group’s shares currently trade at a 15% discount to book value and offer a dividend yield of 7%. This payout is expected to be covered about 1.3 times by earnings this year, and debt levels look comfortable to me.

Elegant Hotels’ share price is up by 5% so far in 2017, having slumped last year in the wake of the referendum. However, although the weaker pound has made staying in Elegant’s four and five-star hotels more expensive, customer demand seems to have remained strong. The group’s latest trading update reported bookings in line with expectations so far this year.

The group has recently acquired a new hotel, Treasure Beach, which will cement its hold on a prime beachfront area in Paynes Bay, Barbados. The group plans to spend $10.5m refurbishing this before launching Treasure Beach back onto the market in November.

This is clearly a growth opportunity, but it also flags up my main concern about Elegant Hotels. Although the company’s financial situation looks strong enough, I suspect its cash flow could be strained by the costs of keeping its hotels freshly updated.

I haven’t yet made a decision about Elegant Hotels, but I’m leaning towards a buy at the moment.

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Should you follow the lead of the directors and buy shares in these three companies?

ARM Holdings

Leading energy-efficient chip designer ARM Holdings has been punching high earnings growth for years. Earnings are forecast to continue rising at a rate of knots, making ARM a rare beast among the companies in the top third of the FTSE 100; namely, a growth stock.

ARM reported another excellent set of results last week: first-quarter earnings were up by 27%. Chairman Stuart Chambers, who joined the company just over a year ago, decided the time was ripe to increase his shareholding from 10,000 shares to 30,000 shares. He was happy to splash out over £240,000 at 1,204p a share.

ARM’s price-to-earnings (P/E) ratio of 38 is certainly a growth rating. But, with the company’s cash-pile growing ever bigger and abundant opportunities in the “internet of things”, I’d say a high rating is merited. And, as I write, you can buy the shares at a slightly lower price than Mr Chambers was willing to pay.

Amerisur Resources

Mid-cap oil & gas company Amerisur Resources has a market value of around £350m and is a top 50 firm on the AIM market. As with other companies in the sector, profits and sentiment have been hit by the fall in the price of oil. Amerisur’s shares are some 50% below their 52-week high.

Since the company released its annual results earlier this month, directors have been buying shares en masse. Chairman Giles Clarke (founder of Majestic Wine), chief executive John Wardle (ex-BP and an industry veteran) and experienced finance director Nick Harrison all opened their wallets, together with senior independent director Stephen Foss and the company’s three other non-execs. Together they’ve bought just shy of one-and-a-half million shares at prices between 23.75p and 30.5p.

Amerisur is focused on South America, and is profitable (a P/E of 12 based on next year’s forecasts) and well-funded (no debt and $96m cash at the last count). The shares — 33p as I write — have moved up since the director buying, but the company still looks to have potential at this level.

Matchtech Group

Established in 1984 and listed on AIM in 2006, Matchtech Group has a market cap of around £165m, and is the UK’s leading specialist recruitment agency. Chief executive Brian Wilkinson — a recruitment industry veteran — who joined the board in December 2013, decided to increase his shareholding substantially following the company’s recent half-year results. He took his interest to 45,000 shares from 10,000 shares with a £193,000 buy at 551.43p a share.

Matchtech has been increasing annual earnings by double-digits since the recession. A dip to single-digit growth is forecast for the current year, but a return to double digits (15%) is pencilled in for next year. The company appears to be quite attractively rated on a forward P/E of 11 and prospective dividend yield of over 4%. And you can currently buy the shares at a slightly lower price than Mr Wilkinson was happy to pay.

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