Alert: this micro-cap stock has massive growth potential

Today I’m profiling two tiny growth companies that are well under the radar of mainstream investors. But don’t be put off by their small market capitalisations. Companies of this size can reward investors with huge gains over the long term.

K3 Capital

K3 Capital (LSE: K3C) only floated in April last year. The £69m market cap company is a business sales and brokerage firm with operations throughout the UK. Through its three trading subsidiaries Knightsbridge, KBS Corporate and KBS Corporate Finance, it acts for vendors of businesses in the price range of £50,000 to £50m. The group has recently received a number of adviser awards, including first place in the 2017 Thomson Reuters Small-Cap Financial Advisory Review.

Since listing on the stock exchange at a price of 95p last year, the shares have soared to 180p today. That’s not surprising when you consider the momentum K3 currently has. Last year revenue and profit before tax rose 26% and 18% respectively, and the dividend was hiked 250%.

Yet to my mind, there could be plenty more to come from this micro-cap star. Today’s half-year results look excellent. For the six months ended 30 November, revenue rose 34% on H1 last year and EBITDA climbed 28%. Earnings per share increased 32% and the interim dividend was lifted by 217%.

Chief Executive John Rigby was upbeat in his assessment of the future, stating: “The positive momentum in the business continues to gain pace and the improved performance across all KPIs, coupled with the robust deal pipelines that exist across all three trading brands, lead us to a confident outlook for both the full year FY2018 and beyond.”

The stock is up around 10% today, but I believe the valuation still looks appealing at present. With analysts forecasting earnings per share of 10p for FY2018, the forward-looking P/E of 18.5 seems justified. Furthermore, if analysts’ dividend estimates are on the money, there could be some huge cash payouts coming to investors. The latest FY2018 consensus dividend estimate is 8.2p per share, a yield of 4.4% at the current share price.

Of course, stocks of this size can be volatile. That means they are higher risk. Yet overall, the risk/reward profile here looks attractive, in my view.

AFH Financial

Another micro-cap financial services stock that looks to offer strong value right now is AFH Financial (LSE: AFHP). The £112m market cap company is an independent financial advisor and discretionary investment manager that is growing at an impressive speed.

Indeed, between 2014 and 2016, assisted by several key acquisitions, revenue increased 60%, while net profit surged 180%. For the year ended 31 October 2017 (full-year results will be released in two weeks), revenue and net profit are expected to rise a further 37% and 130% respectively. Yet it’s not just the acquisitions that are powering the company’s growth, as AFH revealed in a November trading update, like-for-like growth for the year was around 20%.

Over the last three years, AFH shares have risen almost 100%, yet at the current share price, I believe value is still on offer. With earnings per share of 22.6p expected this year, the forward-looking P/E ratio is just 13.1. That valuation looks very reasonable to me, given the company’s track record of strong growth.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Is this the best growth buy of 2018?

January’s flood of updates from high street retailers continued apace this morning with news on recent trading at self-styled ‘king of trainers’ JD Sports (LSE: JD). In my view, now would be as good a time as any to buy a slice of the company. Here’s why.

Christmas cheer

According to the £3.5bn cap, recent positive trading has continued through the second half of its financial year, including the key festive period. Like-for-like sales growth at its stores held steady at roughly 3% with additional sales coming from “material growth” online and ongoing international expansion. As highlighted by the company, this performance was “particularly encouraging” given the rate of sales growth (and therefore tough comparatives) achieved over recent years. 

Perhaps most positively, JD announced that pre-tax profit for the full year would now be around £300m — up on previous market expectations of between £270m to £295m. Contrast this with the simply awful recent statements from other high street operators such as Debenhams and Mothercare and you get some idea of just how well the firm is performing.

Aside from today’s update (and its proven ability to consistently deliver the goods), another huge attraction to JD’s shares at the current time must be the fact that they are currently trading quite some way away from the 450p peak hit in May last year. Earnings estimates for the company’s next financial year (beginning 29 January) leave the Bury-based business on a price-to-earnings (P/E) ratio of just 14. For that, new investors get a company generating excellent returns on the money it invests, boasting enviable free cash flow and possessing a bulletproof balance sheet.  

JD might not end up being the best growth purchase in 2018 but — at this price — it might not be far off.

A poor substitute?

One company I’d be less inclined to invest in at the moment is JD’s retailing peer Sports Direct (LSE: SPD).

Despite group revenue increasing 1.2% over the six-month period to 29 October (or 4.7% when acquisitions, disposals and currency fluctuations are taken into account), December’s interim results revealed a 1% dip in UK retail sales as a result of “reduced online promotional activity and store closures“. In addition to this, reported pre-tax profit plummeted by 67.3% to just under £46m, with levels of debt continuing to swell thanks to investment and share buybacks.

Changing hands for just under 20 times earnings, Sports Direct’s shares look fairly fully valued at the moment, even if the company anticipates underlying EBITDA growth of between 5% and 15% for the full year. Perhaps that’s why the shares have lost momentum over recent months, falling 10% from the highs achieved last summer. When you consider that some holders will have bought into the company when it traded around the 250p mark, it’s not entirely unreasonable that some will be wanting to bank profits.

Moreover, any prospective owners need to be comfortable with the company’s ‘interesting’ approach to corporate governance and its apparent inability to stay out of the headlines for long. Recent less-than-favourable coverage has included being exposed for paying its staff below the minimum wage and a shareholder revolt following CEO Mike Ashley’s attempt to award his former IT chief (and elder brother) £11m — rather ironically — because he had been underpaid for previous work. 

For a less anxious ride, I know which shares I prefer.

Fancy quitting the rat race?

Thanks to its superb performance over the years, JD Sports is likely to have made many early owners very wealthy indeed, perhaps even to the point of being able to retire early.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 resurgent big-dividend payers that could make you rich

Dunelm

As so often happens on the stock market, homewares retailer Dunelm Group’s (LSE: DNLM) downward share price movement this morning seems at odds with its positive-sounding second quarter trading update.

The firm reported a year-on-year total increase in sales of 13.6% for the first half of its trading year to 30 December, of which total like-for-like sales are 6% higher. That kind of progress over the past six months doesn’t sound to me like a business sinking in some kind of death spiral as many fear could be the way of traditional retailers.

Emerging growth and market share gains

Chairman Andy Harrison was upbeat, saying: This performance is driving our continued market share gains. We are now up to 169 superstores having successfully opened five in the quarter.”

Expansion rolls on unfettered, and digging into the figures reveals promising growth of almost 37% in the first half for online sales, fuelled by the company’s acquisition of Worldstores a little over a year ago. Online sales have reached 16% of total sales and 18.5% if you include reserve-and-collect customer activity. Mr Harrison said: “We are well on the way to becoming a genuine multi-channel retailer,” and I reckon emerging fast growth within an established set-up such as Dunelm can be an attractive situation.

However, although profit margins were maintained in the first half, Dunelm expects margins to weaken because online Worldstore sales have been less profitable and greater sales were stimulated by seasonal and end-of-season reductions. Maybe this news on margins is causing today’s share price weakness. Yet despite a change in the margin mix, the directors expect profit growth for the full year. Meanwhile, at today’s share price around 675p we can pick up Dunelm shares on a forward price-to-earnings (P/E) ratio below 13 and a forward dividend yield close to 4.4%, which strikes me as reasonable value for what looks like a growing enterprise.

Meanwhile, emerging markets asset manager Ashmore Group (LSE: ASHM) released its second quarter assets under management (AuM) statement this morning, revealing a decent performance over the period to 31 December. AuM lifted $4.5bn due to inflows from investors of $3.6bn and a positive investment performance of $0.9m. Things are moving in the right direction.

Emerging markets are on the rise

Chief executive Mark Coombs reckons that investors are being encouraged to invest in the firm’s funds because emerging market assets have delivered “strong absolute and relative” performance over the past two years. He said competitive currencies have been driving exports leading to an acceleration in economic growth in emerging markets. Looking forward, he said: “The next phase of the cycle should see institutional flows stimulating domestic demand and so provide for continued attractive returns, particularly from local currency-denominated assets including equities.”

Such views enable the firm to offer a positive outlook statement and Ashmore expects another year of outperformance in emerging markets during 2018. We can participate by picking up some of the firm’s shares on a forward P/E ratio a little over 19 for the year to June 2019 and the current share price near 432p also throws up a forward dividend yield around 4%. If emerging markets continue to do well as expected, we could see further progress with the share price and a valuation maintained at these levels.

Should you hold these two for 2018 and beyond?

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why Provident Financial plc could be flashing a warning for 2018

FTSE 100 falling prices

The trading update released by Provident Financial (LSE: PFG) on Tuesday showed the lender’s outlook remains tough. Its performance in 2017 was relatively disappointing, and this sent its share price lower by as much as 10% on the day of release.

Looking ahead, it would be unsurprising for there to be more falls in its share price in the short run. Here’s why the stock could be one to avoid in the near term, at least.

Disappointing performance

Perhaps the most disappointing part of the update was the fact that its Consumer Credit Division is expected to report a pre-exceptional loss at the upper end of guidance provided in August 2017. It’s expected to lose £120m in 2017. But more worrying for investors is the fact that the expected rate of reconnection with customers — who had seen their relationship with the company adversely affected by the migration to the new operating model — was lower than anticipated.

This lower than expected rate of reconnection means that the turnaround potential of the home credit division may be lower than many investors had anticipated. In fact, it could mean that a proportion of previous customers are now lost, and that the division will have to rebuild at a much slower pace. This could mean that the financial performance is less impressive than previously forecast.

Investigations

In addition, Provident Financial remains under investigation by the FCA. It is co-operating with the regulator, but with two investigations ongoing, there could be further volatility in its share price. Investor sentiment could be held back while the investigations continue. Should their outcomes be negative to the business, it could lead to a fall in the value of the company. As such, it may be prudent to wait for further updates before buying the company – especially while it is still searching for a new management team.

Investment opportunity

While Provident Financial may be a stock to avoid at the present time, financial services sector peer St. James’s Place (LSE: STJ) could generate impressive share price performance. The wealth management company is expected to post a rise in its bottom line of 25% this year, followed by further growth of 19% next year. Despite this strong rate of growth, it trades on a price-to-earnings growth (PEG) ratio of just 1.1. This suggests that it may be undervalued in what remains a buoyant wider stock market.

St. James’s Place also offers a bright future from an income perspective. It’s expected to post a rise in dividends of 33% over the next two financial years. This means it could be yielding as much as 4.4% in 2019, which could boost investor interest in the stock. With the global economic outlook continuing to be generally positive, and investor sentiment remaining optimistic, the investment prospects for the stock could prove to be very impressive.

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Peter Stephens has no position in any company mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

These promising small-cap stocks could be millionaire-makers in 2018

FTSE 100 Share prices going up

While the stock market may have risen to a record high this year, there are still a number of stocks which could be worth buying. Clearly, the general level of share prices is now higher than it has been in the past. But with the prospects for a number of sectors being relatively positive, there could be upside potential ahead.

That’s particularly the case with smaller companies, where valuations may not have risen by as much as their larger stock market peers in recent years. With that in mind, here are two small-cap stocks which could deliver high returns this year.

Encouraging performance

Reporting on Tuesday was SIPP provider Curtis Banks (LSE: CBP). The company’s performance in 2017 was encouraging, making strong progress with the integration of Suffolk Life Group. It traded in line with management expectations, with new SIPPs during the year amounting to 8,798, and overall SIPP numbers increasing to 76,474. Attrition rates on own SIPPs have remained in line with previous years at 5.7%, with the company’s assets under administration totalling £24.7bn, versus £20.4bn last year.

Looking ahead, Curtis Banks is expected to report a rise in its bottom line of 12% in the current year, followed by further growth of 10% next year. Despite such a strong rate of growth, its shares trade on a price-to-earnings growth (PEG) ratio of only 1.5, which suggests that there could be upside potential ahead.

In addition, the company has improving income prospects. It’s expected to have a dividend yield of around 2.3% in the current year. But with dividends due to be covered 2.5 times by profit, there could be significant growth ahead here. As such, the total return on offer could be high in the long run.

Improving outlook

Also offering investment potential within the wealth management space is Brooks Macdonald (LSE: BRK). The company’s financial performance is linked to that of the stock market, so it’s perhaps to be expected that it’s forecast to deliver strong earnings growth in the near term. In fact next year, the company’s bottom line is expected to rise by 22%, which puts it on a PEG ratio of 0.6. This suggests that it may be deserving of a higher valuation if it’s able to deliver on the upbeat forecasts.

Shareholders are expected to benefit from rising earnings via a higher dividend. In fact, shareholder payouts are forecast to rise by 22% in the next financial year. This would put the stock on a dividend yield of 3.1%, with dividends being covered 2.3 times by profit. This suggests that further double digit dividend growth could be on the cards, which could make Brooks Macdonald a worthwhile income play.

Certainly, the company may not offer the stability of other income stocks over the long run. But for investors who are concerned about inflation, it could be a realistic alternative.

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Peter Stephens has no position in any company mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 investment trusts that should line your pockets

City of London office blocks

Investment trusts are one of the best assets to buy if you want an experienced manager to manage your wealth with little to no effort on your part. 

What’s more, unlike many other funds, investment trusts are not limited in the assets they can hold, which allows managers to seek out the best ones to buy all over the world. And some investment trusts have been around for 100 years or more, so they have a lengthy record for investors to consider before buying.

A global outlook

EP Global Opportunities Trust (LSE: EPG) is UK-listed with a worldwide mandate. Since inception in December 2003, it has achieved a compound annual return for investors of just under 10.1% by investing globally in undervalued securities. 

EP Global’s broad investment mandate allows it to invest where many other funds would be afraid to tread. For example, of its top 10 holdings, only three are UK based (four including Royal Dutch Shell, although EP owns the A shares which are domiciled in the Netherlands). Non-UK holdings include pharmaceutical giant Novartis (Switzerland), Bank Mandiri (Indonesia), Commerzbank (Germany) and Shanghai Fosun Pharmaceutical (China). Together, the top 10 holdings account for just under 30% of assets and provide a great play on global growth trends. 

The net asset value of EP Global is 345p per share at the time of writing, so today the shares are trading at a discount of around 5%. As well as this discount, the shares offer a yield of 1.3%. The management fee is 1% per annum. 

Overall, if you’re looking for a play on global growth that’s got a track record of double-digit returns behind it, EP Global seems to me to be the perfect buy. 

Private equity profits 

Another trust I like the look of is ICG Enterprise Trust (LSE: ICGT). ICG is a private equity business, so its business model varies significantly from that of EP Global, but that hasn’t stopped the company from beating the market. 

During the past decade, shares in the fund have returned 123.9%, excluding dividends, compared to the FTSE All-Share Index return of 78.4%. 

According to the investment company’s results for the three months to the end of October, which were published today, it produced a total return of 9.1% for investors over the nine months to the end of the period, thanks to some key disposals and cash returns. Management is targeting a 20p per share dividend for the end of the year, as well as a share buyback. 

As it sells down some investments into a seller’s market, ICG is re-investing some of its proceeds into new opportunities such as the co-investment of £8.1m in Visma, provider of accounting software and business outsourcing services, alongside peer fund ICG Europe VI. 

So all in all, if you’re looking for a trust that’s got a record of beating the market by investing in unquoted securities, that’s also returning funds to investors, IGC ticks all the boxes. 

Making money the easy way

Investment trusts can be a great tool to improve your wealth with minimal effort as they’re usually run by experienced managers who know the ins and outs of the market. Indeed, EP Global is a great example of how trusts can create wealth for you with little effort on your part. 

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Rupert Hargreaves owns shares in Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 top value and income stocks I’d buy in 2018

Communisis (LSE: CMS) is, in my view, one of the markets most underappreciated companies. Over the past five years, the group has moved away from its traditional business of print marketing to become an integrated global marketing business. 

As the business has transitioned, earnings have multiplied. For 2017, City analysts are projecting normalised earnings per share of 6.4p, compared to 3.2p for 2012… 100% growth in five years. 

However, despite this rapid growth, the market continues to place a low multiple on the shares. At the time of writing, shares in Communisis are trading at a forward P/E of 11. They also support a dividend yield of 4%. 

On-track for growth 

According to a trading update issued by the firm today, management believes that Communisis is on track to hit City forecasts for the year. The year-end update notes the company “performed well in 2017, with growth in sales and profitability, good free cash flow and a further marked reduction in net debt“. As a result, “the board anticipates that audited results for the year will be in line with expectations.” 

During the period, net debt declined to £24.3m from £30.4m, while the accounting deficit related to the group’s defined benefit pension scheme fell to £38m from £55.5m. And it looks as if Communisis’ buoyant trading is set to continue for the next few years, revealing today that it has expanded “facilities in the North East of England to meet increased demand for fast-turnaround campaign fulfilment“, as well as signing a new five-year contract with a major UK bank client. 

All in all, Communisis is growing, has a bright outlook for growth, and is generating plenty of cash. To add to the investment case, the shares are also trading at an attractive earnings multiple and offer a market-beating dividend yield. This is why I’d buy the stock in 2018. 

Steady recovery 

Communisis’ peer Huntsworth (LSE: HNT) is also on my radar for 2018. Huntsworth is a marketing firm that specialises in healthcare, but management has made some missteps over the past five years. These issues saw the group plunge into a loss of £56m on writedowns for 2014.

Nevertheless, since 2014, Huntsworth has made steady progress streamlining its operations and analysts expect the group to report a net profit (for the first time since 2014) of £18m this year. Net debt at 30 November 2017 was approximately £44m, equating to less than 1.5x net debt to pro forma EBITDA, and below the £75m borrowing limit agreed by creditors.

Like Communisis, Huntsworth also trades at an attractive valuation considering its growth potential. With adjusted earnings per share growth of just under 15% expected for 2017, the shares look cheap, trading at a forward P/E of 13.2 and support a dividend yield of 2.5%.

As the firm continues to reinvest earnings back into its operations (management agreed at least one major acquisition last year), growth should continue. What’s more, now that the company has put its problems behind it, the market might reward the shares with a higher multiple. 

Avoid these key mistakes 

Thanks to their attractive qualities, Communisis and Huntsworth look to me to be great buys for 2018. If you’re looking for more investment tips, the Motley Fool has put together this free report, which is a collection of Foolish wisdom designed to help you streamline your investment process and avoid making any serious investment mistakes

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One growth stock I’d buy today and one I’d sell

Big data

One of last year’s hot growth stocks was big data software firm WANdisco (LSE: WAND). This AIM-listed stock has delivered a 195% gain for shareholders since the start of 2017.

However, shares in the firm fell by 7% this morning, despite WANdisco revealing that its total bookings — the value of contracts received during the period — rose by 45% to $22.5m in 2017.

Even the news that bookings for the group’s Fusion product climbed 121% to $15.7m wasn’t enough to excite investors.

It’s clear that Fusion is the firm’s big growth hope for the future. Indeed, today’s figures suggest to me that bookings for the group’s other main product, Source Code Management (SCM), fell from $8.4m to $6.8m last year.

Why I’m worried

Unfortunately today’s trading update didn’t provide any update on expected revenue for 2017. Many of the firm’s contracts stretch over more than one year, so I expect revenue to be lower than the $22.5m reported as new bookings.

Consensus forecasts are for revenue of $17m in 2017. Today’s share price fall suggests to me that the company is not expected to have exceeded this figure.

After such a strong run last year, my view is that WANdisco looks a little too expensive for a lossmaking company, especially one that recently raised $22m by selling new shares. Another year of losses is forecast for 2018. On this basis, the stock’s price/sales multiple of 31 seems dangerously high to me. I would sell after last year’s strong run.

One stock I would buy

Investors seem to have given up all hope of earnings growth at spread betting and CFD firm CMC Markets (LSE: CMCX).

The main reason for this is that the market has no way of predicting how hard the company’s profits will be hit by the FCA’s planned leverage limits for retail clients.

Markets hate uncertainty and often discount shares heavily in such situations. This can create good buying opportunities.

A contrarian buy?

CMC shares have halved since hitting a high of 290p in July 2016. This decline has left the stock trading on a 2017/18 forecast P/E of 10.9, rising to a P/E of 12.6 for 2018/19.

This shares’ rising P/E ratio reflects an expected 14% fall in earnings this year. Clearly this isn’t good news. But CMC has a strong balance sheet with plenty of surplus cash. And the group’s current operating margin of 30% suggests to me that it could still operate profitably with lower margins.

One risk is that CMC is smaller than sector leader IG Group. Regulatory costs generally affect smaller companies more heavily, due to the higher cost per client. However, I think CMC should be big enough to manage.

What does the future hold?

CMC is focusing on higher-value retail clients and is diversifying into providing electronic trading facilities for institutional clients. Although this business isn’t quite so profitable, it should help support volumes if the number of retail clients falls.

The shares currently trade on a 2018/19 forecast P/E of 12.6, with a well-covered 5% dividend yield. I believe this stock could be worth buying for growth and income at current levels.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 growth stocks I’d buy before it’s too late

online education computer

Today, I’m looking at two smaller companies that have significant growth potential. Both could reward investors with capital gains and dividends. 

Cybersecurity specialist

Cybercrime is a huge problem for businesses and governments today. Indeed, according to IBM CEO Ginni Rometty, it’s the “greatest threat” to every company in the world right now. Looking at the stats, I tend to agree. In 2016, cybercrime cost UK businesses alone around £30bn.

That’s why I believe investors should look at cybersecurity specialist NCC Group (LSE: NCC). Headquartered in Manchester, the £600m market cap company specialises in protecting businesses against the ever-evolving threat landscape. It currently serves over 15,000 clients across the world.

The group experienced ‘growing pains’ in 2016. It made a series of acquisitions between 2013 and 2016 before realising that it had grown too quickly. Back-to-back profit warnings saw the stock fall from 350p to 110p.

However, the business now looks to have stabilised, with Chairman Chris Stone stating this morning that it has “delivered a significant recovery from the low point of the second half of the prior year.” Indeed, half-year results released today look robust. Although operating profit fell 10.8%, revenue climbed 7.2%, operating cash flow increased 20.5% and the dividend was maintained at 1.5p. Mr Stone also commented: “Strong organic revenue growth in our core assurance businesses continues to drive positive momentum in the business.”

Looking ahead, I believe NCC has bright prospects. For FY2019, analysts have pencilled in earnings growth of 15%. The shares don’t trade cheaply, on a forward P/E ratio of 28, yet if NCC can continue to build on its momentum, I think there’s potential for further gains.

A cheap UK bank stock

Moving across to the banking sector, I also like the look of challenger business OneSavings Bank (LSE: OSB) right now. Shares in the £990m market cap lender look too cheap, to my mind.

The bank has enjoyed strong growth in recent years, with net profit surging from £27m to £121m between 2013 and 2016. A trading update in November revealed further progress, with loan book growth of 17% for the nine months to 30 September.

Yet the stock’s valuation simply does not reflect this momentum. With analysts forecasting earnings per share of 48.3p for the year just passed, the estimated P/E ratio is just 8.3.

What also appeals to me here is the potential for big dividends. The bank is growing its payout at an astonishing rate. Last year, the dividend was hiked by 21%. For FY2017 and FY2018,  analysts expect growth of 20% and 27% respectively. The expected payout of 15.9p per share for FY2018 equates to a yield of a healthy 3.9% at the current share price with strong coverage of over three times as well.

When you consider that rival Aldermore was recently acquired at a P/E of around 10, OneSavings’ current valuation looks compelling, given the bank’s momentum. The stock is a ‘buy’, in my opinion.

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Edward Sheldon owns shares in NCC Group. The Motley Fool UK owns shares of NCC. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.