Sopheon — which provides enterprise innovation management (EIM) solutions that allow managers to effectively monitor and use data — said that revenues jumped 19% year-on-year in the first half to $16.5m. In addition, it said that recurring revenues improved by a fifth over the period as attempts to migrate to a software-as-a-service (SaaS) model business paid off.

As a result adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) at Sopheon rose 8% year-on-year. Trading at the business is improving rapidly but I’m afraid I won’t be buying this share any time soon. Its forward price-to-earnings (P/E) ratio of 842 times is gargantuan and could prompt a severe share price correction if sales don’t keep rising at an electrifying rate. The EIM market is growing rapidly but the company faces intense competition from industry heavyweights like IBM and SAP.

A better buy?

The Grafton Group (LSE: GFTU) share price has also risen following the release of its own market update. At £13.44 per share the UK retail share was trading 2.7% higher on Tuesday. It struck record highs around 10p higher earlier in the day.

In its half-year financial statement, Grafton — which supplies building materials and DIY products through a wide variety of retail brands — said that revenues rocketed 46.1% in the first half of 2021, to £1.03bn. This in turn drove pre-tax profit to £142.9m, up a whopping 384.8% from a year earlier.

The bottom line also benefitted from a significant year-on-year improvement in operating margins. Stripping out property profit these jumped to 13.9% from 6.7% previously. And pleasingly cash generation at Grafton also clicked through the gears between January and June. This resulted in net cash of £302.5m on the balance sheet at the end of the half, up around £245m from June 2020 and giving the company plenty of financial strength to pursue its M&A-led growth strategy.

Why I’d buy this UK share

I think Grafton Group is a top UK growth share to buy today. City analysts think earnings here will rocket 67% during 2021, a bold estimate that doesn’t surprise me for a number of reasons. The construction market is booming and should continue to improve as the economic recovery clicks through the gears, keeping demand for Grafton’s products bubbling nicely. It’s a trend which the company’s healthy appetite for acquisitions should help it to exploit to the fullest too.

Speaking of which, I’m also encouraged by Grafton’s attempts to expand its geographical footprint to boost profits growth (its most recent purchase in July saw it enter the Finnish market by acquiring IKH). Today the FTSE 250 firm trades on a forward price-to-earnings growth (PEG) ratio of just 0.3. This sits well inside the widely regarded bargain benchmark of 1 and below. While supply chain problems could blow current forecasts off course, I think this UK share could still be too cheap to miss.

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The software and services company provides customer-firms and organisations with “complete enterprise innovation management solutions including software, expertise, and best practices.” The firm’s Accolade solution covers the innovation management and new product development lifecycle, which includes strategic innovation planning, road-mapping, idea and concept development, process and project management, portfolio management and resource planning.  

International sales

The offering is popular, and Sopheon boasts some 250 customers and 60,000 users from more than 50 countries, with the majority of the operating profit earned in the US.

Indeed, there’s been a bit of a buzz about the company and its long-term potential in the investing community lately, and trading figures have been coming in ahead of expectations for a while. And I think that’s part of the problem today, which could account for the weakness in the stock on these results.

When outperformance is well known, the valuation of a company can be fully up with events, and the only thing that will move a share price higher on results day is likely to be unexpected further operational outperformance. Sopheon is reporting as expected, so any speculation baked into the price about unexpected progress is probably unwinding today. We see this over again on the stock market and it calls to mind the old adage, ‘buy the rumour, sell the fact’.

The headline figures look good with revenue almost 19% higher than a year ago, profit before tax up just over 25%, and the net cash balance shooting almost 76% higher to $16.7m. The directors expressed their satisfaction and confidence in the outlook by slapping another 30% on the dividend.

Going for growth

Chairman Barry Mence explained in the report that Sopheon has a “large diversified blue-chip client base, a comprehensive software platform and deep sector expertise.” There were 18 new customer wins during the year, which compares to 13 in 2017, and he believes the time is right for Sopheon to accelerate investment and “solidify” its “leadership position.” The company has around $20.6m of sales visibility and the pipeline includes “a number of large opportunities.”

But Sopheon’s success has not gone unnoticed. Even at today’s share price close to 1,031p after this morning’s decline, the stock is more than 1,000% higher than it was three years ago. Had you been holding, that would have been an investing success by most standards. But even now, the market capitalisation sits near to just £116m, which means the firm remains in small-cap territory. I can’t help believing that the forward potential is still large for the company and its investors.

If you dig in to research Sopheon you’ll find some impressive quality metrics and a full-looking valuation. I believe the long-term potential of the company is attractive and would be inclined to look at setbacks in the share price like today’s as more of a buying opportunity than a reason to abandon the stock.

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When a growth share becomes widely followed, speculation can drive up the valuation so high that any investment you make in the company’s shares can face downside risks brought on by a valuation reversal. And that can happen despite strong operational progress in the underlying business.

New to the stock market and growing fast

I like the look of two small-cap shares and I think they could do well for investors during 2019 and beyond. The first is Filta Group Holdings (LSE: FLTA), which provides cooking oil filtration and fryer management services to restaurants and other food establishments. During 2017, around 72% of the firm’s revenue from continuing operations came from the US and 28% from the UK.

The company started up around 20 years ago in the UK and has expanded both at home and abroad, organically and through acquisitions. The outlook is bullish and the firm expects to grow further by both methods in the short, medium and long term. Yet despite its long history, Filta only arrived on the stock market with its Initial Public Offering (IPO) at the end of 2016, which I see as another positive. I believe firms can be at their entrepreneurial best and often well-financed when they first go public, which means a strong growth phase can follow. Getting into a share within a short time following its IPO can work out well for investors in some cases.

Decent quality indicators

If you dig into Filta, you’ll find decent quality indicators such as a return on capital running close to 21% and an operating margin at about 15%. There’s also a robust outlook for earnings growth, a reasonable valuation given the firm’s prospects and a handy dividend to collect. Meanwhile, the balance sheet is strong with a decent net cash position. There’s a lot to like about Filta despite its small market capitalisation close to £69m.

The second share I’m keen on has a higher market capitalisation near £118m. Sopheon (LSE: SPE) provides software and services for product lifecycle management. In 2017, around 60% of revenue came from America and 40% from Europe, but 92% of the operating profit was earned across the pond and just 8% from Europe, so America is an important geography for the firm.

Building a blue-chip client base

Sopheon has been making solid progress building up its blue-chip client base and the outlook is positive. Other attractions include a strong balance sheet with a net cash balance and robust quality indicators, such as a return on capital of around 30% and an operating margin running at about 20%.

Although the valuation looks full and fair given the growth on offer, there is a small dividend to keep investors company and a recent history of robust operational and share-price momentum. I think both these companies would sit well in a diversified portfolio aimed at capturing ongoing growth potential. 

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Now though, the stock appears to have a wider margin of safety. As such, it could offer stronger capital growth potential than the FTSE 100. Alongside another growth stock that reported an encouraging update on Friday, it could be worth buying, in my opinion.

Improving prospects

The company in question is software and expertise specialist for Enterprise Innovation Performance Sopheon (LSE: SPE). The company has seen continued commercial delivery in the final months of the 2018 financial year. As a result, it expects that revenue for the year will be in line with previously upgraded market expectations. It also believes that there could be a stronger outperformance at the EBITDA and pre-tax profit levels.

The company is forecast to post a rise in earnings of 27% in the 2019 financial year. This would be a strong performance and, if achieved, would be the fourth consecutive year of earnings growth.

With Sopheon’s share price having risen by 154% in the last year, it is perhaps surprising that it still appears to offer a wide margin of safety for new investors. It has a price-to-earnings growth (PEG) ratio of just 0.9, which suggests that it may offer growth potential. With it seeming to have a sound growth plan, it may be able to deliver continued share price increases over the medium term.

Turnaround potential

While the Boohoo share price has declined in recent months, the outlook for the company appears to be relatively impressive. It is forecast to post a rise in earnings of 18% in the current year, followed by further growth of 24% next year. These growth rates could stimulate investor interest in the company, with it seeming to have a solid strategy that has been successful over a sustained period.

After falling heavily in recent months, the stock now has a PEG ratio of around 1.5. This indicates that while there may be cheaper options available in the retail sector, few retail companies with major exposure to the UK may be able to compete in terms of their growth potential.

With Boohoo having an online focus, it may be well-placed to benefit from a continued shift of consumers towards online options. Recent research suggests that there may be twice as many physical shops in the UK than are required. This means that a number of the company’s retail segment peers may be forced to close stores and incur further costs from the disruptive forces of the internet. This could provide it with a competitive advantage and could lead to further growth over the long term.

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Big upgrades

Whenever a company boasts in its trading statement for the first six months of the year that results will be “significantly ahead of market expectations” as it did back in October, I think it’s worth taking a closer look. When H1 results were released it revealed revenue increased 51% and earnings-per-share increased 70%, so it didn’t disappoint.

Looking ahead, it is releasing several new products and told us it has strong orders through next year. It is expanding internationally and has indicated that there is growing demand for its vehicle-testing services. Factoring all of this in, I think it is a very exciting time to be holding this share.

But I’m taking a wait and see approach for now. My main reservation currently is that directors have been very busy selling shares recently. While management can’t be faulted for cashing in some profits, the sizes of the holdings are significant. It looks like eight directors in total have offloaded shares with some selling over 50% of their holdings. But Anthony Best (the AB in the company’s name) sold a small amount and still retains over 30% ownership of the company, which is encouraging.

Also it had a new CEO as of October which can signal a change in fortunes so I’d wait for confirmation that progress is continuing before buying.

Growing ahead of demand

Sopheon (LSE:SPE) is a computer software company that has also been thriving recently. It is up 15% since October on the back of a big upgrade in forecasts. It provides software that helps companies produce estimates, and subsequently savings, through lifecycle management.

The trouble with this company is that its revenue guidance makes it very difficult to value. We have to do a bit of puzzle-solving to get an approximate figure. Revenue for 2018 was forecast at $31m (despite being listed on AIM, it reports in dollars) but in its half-year results it was stated that “revenue visibility for the year [is] already at $27.2m”. However it has since stated that it had a record Q3 and that visibility is now above $30m with two new deals in chemicals and electronics. Since then it has released news of an additional contract with The Nature’s Bounty Co. This is a billion dollar health firm so presumably this could have pushed revenue over revised forecasts of $32.5m.

These constant upwards revisions leave a lot of room for speculation, so I would conjecture that revenue will be in the mid-30s. Its deals are large but infrequent, so it would be risky to assume that it will be higher. Regardless of the exact figure, this company is growing so quickly that the share price can’t keep up. With this in mind, I’d consider buying into this company.

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However, a number of shares have been able to beat the index during this time. GlaxoSmithKline (LSE: GSK) has performed well, rising by around 15%. Similarly, software and services provider Sopheon (LSE: SPE) gained 10% on Monday following its trading update. This takes its gain for 2018 to around 180%. Looking ahead, could there be further growth to come from either stock?

Impressive performance

Sopheon’s trading update showed that the third quarter of the year was exceptionally strong. Momentum since the second quarter has been maintained, and a number of further transactions have been signed. This has resulted in a record third quarter. Contract wins have included two material contracts booked during the final days of the quarter which have helped to break revenue visibility through the $30m level.

The company remains optimistic on its future outlook. It views the continued delivery of commercial results as indicative of the growing maturity of the market that it serves, while its sales pipeline activity for the balance of the year remains robust.

Sopheon is expected to report a rise in earnings of 27% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of 0.9, which suggests that it continues to offer good value for money. Therefore, even after its sharp rise in value over recent months, there could be further upside ahead.

Improving outlook

The prospects for GlaxoSmithKline also appear to be improving. The company has the potential to capitalise on the world’s ageing population through its focus on consumer healthcare products, vaccines and pharmaceutical products. Its recent decision to focus on a smaller number of higher-reward products within its pipeline may provide it with a stronger growth outlook over the long run, which could help it to justify a higher valuation.

At the present time, the company has a dividend yield of around 5.2%. This suggests that there could be a margin of safety on offer. With the company expected to report a 4% rise in earnings in the next financial year, dividend growth could be restarted after an extended period of flat payments. This has helped to boost the company’s dividend cover so that it now stands at 1.4. This suggests that there could be improving income investing potential on offer over the medium term.

With GlaxoSmithKline having a diverse and relatively defensive business model, it could prove to be popular should the FTSE 100 experience uncertainty over the coming years. After a 10-year bull market, defensive shares could become more enticing to long-term investors over the next few years, with the chances of a further decade of uninterrupted stock market growth being unlikely.

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But can this small-cap continue to beat the market? Today I’m going to try to answer this question.

Growth revival

Looking at the company’s historical numbers, it is immediately clear why shares in Sopheon have done so well over the past two years. 

The group didn’t break even until 2015. Another healthy year of growth in 2016, convinced the market Sopheon’s profitability was sustainable. Since then, the firm has gone from strength to strength.

Today, the group has reported that pre-tax profit hit $2.9m in the six months to the end of June, up 62% year-on-year. Revenue for the period increased by around 27% to $15.9m.

Unfortunately, sales and marketing expenses also jumped, rising 17% to $4.1m. Although, it is unsurprising that costs have grown as the business has expanded.

For the full-year, Sopheon is now expecting revenue of $27.2m, down slightly from the $28.5m reported for 2017, but significantly above the $23.5m guidance given at the time of the company’s annual general meeting in June.

If this momentum continues, I reckon the company could end up beating its own forecasts. Indeed, the firm notes in its half-year report that performance was better than expected as “both the market, and our reputation and position, continue to advance.” Put another way, it looks as if Sopheon is benefitting from a snowball effect. 

Management is so confident of the outlook for the business, earlier in the year the firm declared its first ever dividend of 2.5p per share.

Sopheon is making all the right noises, and I believe the company’s growth is only just getting started. With this being the case, I’m not put off by the stock’s forward P/E of 23.7. With $15.5m of net cash on the balance sheet as well, this business seems to have less risk than many of its fast-growing tech peers.

Complex business

With a market cap of around £100m, Sopheon might be too small for some investors. If you’re looking for a bigger tech play, Microgen (LSE: MCGN) is one of my favourite picks in the space.

It offers a highly technical and specialist service to customers in the financial services sector. It provides software to help fund managers administer assets under management, among other things.

As the volume of regulation the financial services sector has to deal with has increased, demand for Microgen’s products has jumped. Net profit has doubled over the past five years. Analysts are expecting a slight decline in EPS this year, but growth is expected to return in 2019. The figures indicate that the stock is trading at a 2019 P/E of around 21, which I reckon is a fair price for this business.

In fact, you could argue the company deserves a higher multiple because it’s clients are unlikely to switch products regularly due to the complexity of changing over an entire computer system and the possibility of customer data loss. As Microgen continues to grow, the shares could head much higher in the years ahead.

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The company in question is Sopheon (LSE: SPE), which provides software to help companies manage innovation and product development. The firm’s client list includes blue-chip names such as PepsiCo, Proctor & Gamble and pharmaceutical giant Merck. So it seems to be a fairly credible business.

Sopheon’s revenue rose by 11% to $23.2m in 2016, while pre-tax profit rose by 125% to $2.7m. This dramatic increase was mostly down to a reduction in research, development and administrative costs, which fell from $7.1m in 2015 to $6.4m in 2016.

The company issued an upbeat AGM statement today. So far this year, 20 licence orders have been received, up from 14 at the same point last year. Revenue visibility for the full year is currently $17.5m, up from “just under $17m” last year. These figures suggest to me that the strong momentum seen last year is continuing, although revenue per licence may still be falling — a trend the company reported in 2016.

Sopheon ended last year with net cash of $4.2m, so debt doesn’t seem to be a problem. However, one risk facing shareholders is the prospect of serious dilution if £2m of convertible loans (due in 2019) are turned into shares. Doing so would increase the share count by 2.6m, or about 35%, effectively reducing earnings per share by about 26%.

For this reason, I’d argue that with a forecast P/E of 15 for 2017, Sopheon is fairly valued at present. I’d hold at current levels.

Will this disrupter make it big?

Shares of online estate agent Purplebricks Group (LSE: PURP) are worth 255% more than they were one year ago. Annual sales have risen from £3.39m in 2015 to a forecast level of £43m for the year ended 30 April 2017.

Encouragingly, the group’s UK business is expected to report a full-year adjusted EBITDA profit this year. The firm’s strong growth is expected to continue, but it’s worth noting that Purplebricks shares now trade on a price-to-sales ratio of 40. That’s astonishingly high, especially for a lossmaking business.

Investors are clearly pricing-in a dramatic increase in sales and profits in the future. One of the main reasons for this is the recently announced plan to expand into the US market. If successful, this could open the door to a market many times bigger than the UK.

However, gaining market share in the US — in the face of growing competition — is unlikely to be easy. Even if Purplebricks is eventually successful, I wouldn’t be surprised to see the group’s share price take a sharp step backwards at some point.

In my view, the valuation could take a sharp knock if market sentiment changes or if overseas growth is slower than expected.

For what it’s worth, I think it’s a good business that could be worth more at some point in the future. But I suspect shareholders will have a rocky ride. I believe a very long-term view will be needed to have any chance of making a profit from current levels.

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Sopheon’s World

The international software and services provider may not have appeared on your radar before, but it makes its money helping its corporate customers boost their revenues and profits by bringing new products to market faster and improving their success rate. Investors have a soft spot for Sopheon after it published its full-year results for 2015, showing it has swung into profit, with management sounding increasingly confident about the future.

Sopheon posted 2015 revenues of $20.9m, a rise of 14.2% on the $18.3m it generated in 2014. It also made a pre-tax profit of $1.2m, turning around the previous year’s loss of $1.5m. EBITDA more than tripled from $1.2m to $4.1m. The outlook for 2016 also looks promising, with full-year revenue visibility of more than $12m, up 17.6% on the 2015 pipeline of $10.2m.

Uber-Mence

Chairman Barry Mence hailed his company’s “strong momentum and pipeline for further advancement in 2016“, which was helped by the release of new software platforms and investments in software services, including its new out-of-the-box Express solution. It has gained market recognition from industry voices such as Gartner, CIMdata and CGT magazine, all of which help drive the share price up to around 98p at time of writing. 

Investors in smaller companies like Sopheon, which has a market cap of just £7.06m must brace themselves for swings like these. Its share price is still below its 52-week high of 107.75p, while volatility is demonstrated by a year-low of 45p last August. Revenues may have risen to $20.9m in 2015 but that followed a dip last year. In 2013, revenues stood at $20.84m, almost identical to 2015. Effectively, they are flat over three years.

I am always wary of buying stocks on the back of a spike like this one. In October last year, for example, the share price leapt from 59p to almost 90p in a couple of weeks, shortly after it released its Accolade Enterprise Innovation Management solution, but it then yielded those gains over the next few weeks.

Licence To Thrill

Where the share price goes in the longer run depends on the success of its future product releases and continuing ability to secure licence transactions from new and existing customers. Revenues and profits may be volatile as a result. That said, Sopheon has an attractive offering, helping companies improve planning, governance and performance measurement on high-risk/high-reward initiatives.

Consumer Goods Technology (CGT) readers have named Sopheon a top provider of New Product Development & Introduction (NPDI) solutions for the consumer goods industry for the sixth consecutive year, which suggests a strong reputation and staying power.

I am also pleased happy to see that the company offers its services across a range of sectors, including defence, oil, high-technology, core consumer goods and chemical, protecting it from a downturn in any one of them. I won’t be diving in on the back of today’s share price bounce, there is always the danger of getting caught out by subsequent profit-taking, but will be adding it to my watchlist.

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