Hunting for growth

i thought it might be interesting to have a general scout around for growth shares. A good place to start seemed to be the FTSE tecMARK Focus Index. I was looking for a combination of reasonable size, not on AIM, a ROE of at least 15%, revenue growth of at least 10%, and a decent balance sheet (z score of at least 3). I haven’t made my way meticulously down the list, so there may be a few gems I’ve missed.

Most don’t seem that interesting – maybe their returns seemed too low, or their revenue was declining. I deally, I’d look for a PER leas than 16, but that list is quite restricted. Here’s a whittled-down list, which meet all of the above requirements, except PER.

NCC – NCC Group – Software – PER 20.8 – does Escrow and Assurance Testing

OPTS – Optos – Healthcare – PER 10.9 – makes eye scanners. I wrote about this one two days ago.

RSW – Renishaw – Electrical – PER 16.8 – makes inspection equipment for healthcare, dentisry, diagnostic equipment and surgery.

SHP – Shire – Pharma – PER 20.2 – it makes drugs

TCY – Telecity – Software – PER 28.3 – provider of network-independent data centers providing colocation and related data centre services.

Not much of a list, admittedly. The majority of them have PERs in the 20’s, too. I have observed that ostensible growth companies on very low valuations can be a warning sign. Motley Fool has sometimes suggested the low-PE ones, and those are the ones that seem to come a cropper more often than the high-PE stocks.

One company in the techMark index is LOG (Logica) – a company of particular interest to me as I happened to work for them in the late 90’s – right at the height of the tech boom. LOG are "IT consultants" – they write bespoke applications according to client needs. At the time, one the directors (MD?), Dr Martin Reed, was the highest paid directors in the Footsie. LOG is interesting as a sorry tale of what can go wrong. Its operating marking have been 6.3% over the last decade – which I think is fairly good proof that consultancies are generally mundane businesses with low barriers to entries. It’s all about the lowest bid.

Looking at the stats, it has been mediocre in many senses. Annual growth rates in EPS has been about 5% over the last decade – hardly something to get one’s pulse racing. Current ROE is mediocre, at 9.4%. That’s about in line with its average. Grearing is 15% and interest cover is over 10. It has negative tangible assets. The z-score is 1.91, which is pretty poor. It has net debt of £295m, which looks bad in relation to net profit of £27.2m, but much more reasonable when compared against net cash flow (before capex) for the year of £154m. I don’t think it should need much capex in any event, as it is a people business rather than an asset-intensive business.

Since the dot-com bust over a decade ago, LOG looks to have been struggling by, and it looks like the near future will be pretty much the same as the recent past. It’s also quite a cyclical business, as expensive projects are amongst the first in the firing line when the economy tightens. I guess it does have the advantage that it can lay off staff if the going gets tough, though; so it’s not saddled with a lot of fixed costs due to unused capacity.

For the record, I’ve never been a shareholder in LOG, even during the heady days. I was sceptical of the company’s rating in the day – it was high (certainly a PER over 20, although 60 rings a bell), so I never invested in the share option scheme. The company seems quite weak to consider a purchase even now. Not all that long ago, it was amongst Sanjeev Shah’s top holding in Fidelity Special Situations, although it has since dropped off his top 10. I think his thesis was the anticipation of a pick-up in IT spending. I have no idea how well the company performed for him – looking at the charts, the share price has been quite volatile, so I think picking the right entry and exit price would have been crucial. The share price is down 40% over 5 years, though. I assume that Sanjeev is more of an in-and-out merchant, so I highly doubt that his performance would have been that bad.

Happy investing to you all!

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About mcturra2000

Computer programmer living in Scotland.
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