Compared with American investors who are lucky enough to have their most popular large-cap index, the S&P 500, generally represent a pretty solid proxy for their economy as a whole, I reckon UK investors are significantly worse off. This is because of the FTSE 100’s overexposure to oil majors, miners and financials with substantial underexposure to fast-growing segments of the economy like technology and healthcare. With this in mind, the FTSE 100 is not an index I’d like to own for the long-term.
A small-cap diamond in the rough
Instead, with decades to go before my own retirement needs, I’d look towards companies with high growth potential like software provider Microgen (LSE: MCGN). The company sells two types of software, one that is used by wealth managers for back-office functions and the other that is used by finance departments for a variety of functions.
The company’s growth is being driven by Microgen branching out into serving new industries, designing new programmes to deepen its relationship with customers, and a general increase in regulatory requirements that leads businesses to pay for specialised software from industry experts rather than doing things in-house.
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The company’s half-year results released this morning show the positive effects of these changes as revenue for the period jumped 23% on a reported basis to £34.9m with organic growth of 11%. Adjusted operating profits rose at a slower clip by 12% to £7.4m. But as the company moves towards generating more of its revenue from high-margin recurring sales, there’s plenty of potential for greater profit growth.
Microgen’s shares aren’t cheap at 21 times forward earnings, but with high growth potential, an attractive business model and cash on hand, I reckon this isn’t a ridiculous price to pay.
An exciting new IPO
Another software provider that I believe has long-term potential is newly-public Avast (LSE: AVST). The company may well be familiar to readers as it’s the largest provider of consumer-facing anti-virus software.
While most of its 435m users only use the free barebones anti-virus software, plenty of consumers and small businesses pay for its product. Over just the past three years, the group’s revenue has ballooned from $251m to $652m thanks to organic growth and acquisitions. Investors will also like that recurring revenue made up 88% of group sales in 2017, allowing management to comfortably pour considerable sums into marketing and R&D budgets that should support long-term growth.
As the importance of cybersecurity awareness rises among consumers and businesses, the group has a clear growth trajectory, albeit with plenty of competitors. However, its market leadership should be a huge competitive advantage over the long term through high consumer brand awareness and substantial financial firepower.
I like Avast’s long-term potential, but as a relatively new IPO I’m also happy to let the company report a few quarters of results before diving in and buying shares. But with considerable growth prospects, a high degree of insider ownership and proven ability to turn a profit, it’s definitely higher on my watchlist than the FTSE 100.
