Outside the slow-growing, slow-moving FTSE 100 giants there are a few gems with high levels of free cash flow, low debt and great management that I believe will outperform the market in the next 12 months and beyond. But how to find them?
Newer investors can put too much emphasis on price-to-earnings ratios: some will see a P/E ratio higher than 15 or 20, and instantly disregard it. But higher P/E ratios don’t immediately make a share a bad investment.
It could be that the shares are expected to grow very quickly and so it’s worth paying a higher price for the promise of even better future earnings. Consider digital fashion star Boohoo, for example. Its P/E ratio has been in the range of 60-75 this year, and it keeps on beating expectations and surpassing earnings records.
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Gaming the system
The Team 17 (LSE:TM17) share price has risen steadily over the last 12 months and I think there’s much further it can go.
A trailing P/E ratio of 42 may put investors off. But I say you’d be missing out.
H1 2019 results saw revenues up 97% to £30.4m, gross profits 119% higher at £15.1m, adjusted earnings per share up 356% and margins up 5% to 49.8%.
CEO Debbie Bestwick is a well-regarded industry pioneer and leads the £442m market cap Wakefield-based indie game developer and publisher, which is probably best known for the multi-million selling 1995 console classic Worms.
After releasing 16 different variations of the game, in 2010 Team 17 restructured away from a single IP company to branch out into mobile and next-gen gaming.
New title Yoku’s Island Express won a BAFTA for best game debut in May this year. Profit and earnings announcements keep on getting better, and results for the year ending 31 December should beat expectations again, driven by “continued sales momentum” across its portfolio and boosted by “strong customer traction,” the board has said.
Net cash is at £35.8m and Team 17 is debt-free, too. The share price is up 35% in the last year, but has dipped 5% in the past month, so I’d say now is your best chance to buy-in relatively cheaply.
Bouncing back
Avon Rubber (LSE:AVON) is another company that doesn’t tend to make splashy headlines, instead focusing on making a mint for its shareholders. The share price is up 135% in the last five years, and revenues keep climbing year over year.
Buying 3M’s ballistic protection business for £75m in August was a sound move. CEO Paul MacDonald said his firm, which makes protection gear for military, fire and law enforcement, now has a “very attractive opportunity” to take advantage of existing body armour contracts with the likes of the US Department of Defense.
The board’s progressive dividend policy is important for the future: it expects to grow its dividends ahead of earnings for a dividend cover of two times earnings per share. Any dividend cover over 1.5 is generally regarded as solid. Meanwhile, cover of less than 1 means dividends are unaffordable and are more likely to be cut.
The future is bright for Avon, as demand for its products continues to grow, which means more profit for the firm, and more growth for shareholders.
If you focus on earnings and future potential, instead of doggedly sticking to P/E ratios, 2020 truly could be a bumper year all round, I believe.
