2 under-the-radar stocks on my watch list this September

Over the past 12 months, shares in Ekf Diagnostics(LSE: EKF) have chugged higher by 50% as investors have regained trust in the company following a turbulent few years.

Indeed, after hitting a high of 38p per share at the beginning of 2014, shares in Ekf slumped to a low of 8.8p at the beginning of 2016 as losses rose fivefold.

But it now looks as if the firm is back on track. According to its half-year report published today, the medical diagnostics and testing company saw revenues expand 22.8% for the six months to the end of June. Gross profit for the period rose 40.6% to £11.8m. Adjusted earnings before interest, tax, depreciation, and amortisation more than doubled from £2m to £4.6m and the company moved into a net cash position of £4.4m, up from a net debt balance of £4.3m at the end of the same period last year.

Simplify and streamline

These figures reflect management's efforts to simplify and streamline the business following its previous problems. The number of manufacturing facilities has been reduced from 12 to seven and a rise in orders has helped accelerate profit margin expansion. For the full year, City analysts have pencilled in earnings per share of 0.9p on a pre-tax profit of £3.8m and revenues of £41.6m. Based on these estimates the shares are trading at a forward P/E of 29.4.

Some investors might be discouraged by Ekf's valuation, but I believe that the shares deserve a place on my watchlist because of the company's strong growth, rapidly growing cash balance and plans to return cash to investors. Management has recently announced plans to buy back up to 15% of the company's outstanding shares to reward shareholders and celebrate Ekf's return to profitability.

Undervalued

Another British diagnostic company I'm keeping an eye on this month is Oxford Instruments(LSE: OXIG). Oxford specialises in nanotechnology tools and services that enable materials characterisation and sample manipulation at the nano scale.

Oxford grew rapidly until 2015 when growth went into reverse and the shares lost around two-thirds of their value in a year. Nonetheless, growth has now returned and investors are starting to trust the company again. For the fiscal year ending 31 March 2018 City analysts are expecting the company to report earnings per share of 53.6p, up 12% year-on-year on a pre-tax profit of £40.5m. Earnings growth of 9% is projected for the following year.

Unfortunately, like Ekf, Oxford also trades at a high valuation, but I believe this is warranted as management's decision to sell its industrial analysis unit would leave the group more focused on the higher-margin nanotechnology and services, and this specialist focus deserves a premium valuation.

The shares currently trade at a forward P/E of 21. I believe as the market wakes up to Oxford's more focused business, which should be able to produce higher profit margins, the shares should re-rate to an even higher valuation. For example, shares in specialist engineering group Renishaw trade at a forward P/E of 32.

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Neither Oxford nor EKF offer much in the way of a dividend, which is bad news for dividend investors.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Renishaw. 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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