Can the IQE share price and this bargain growth stock make you a small fortune?

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Measured over three years, wafer manufacturer IQE(LSE: IQE) is something to sink your teeth into, with the stock up 249% in that time. The investment case has since crumbled with a drop of 54% measured over 12 months. Is the AIM-traded Apple supplier destined to join the long list of UK tech hopefuls that promised so much but ended in disappointment?

Low IQE

IQE suffered a blow last month when it forecast a 16.4% decline in full-year profits, due to a drop in orders from a major chipmaker customer. The group now anticipates full-year revenues of around £160m, up on last year but below previous expectations.

Another concern about IQ, recently highlighted by Rupert Hargreaves, is that it is priced for rapid growth trading at a forward valuation of 37.9 times earnings and any disappointment will come as a blow. Five years of strong earnings per share growth will come to an end this year, with a massive forecast drop of 46%, although a forecast climb of 82% in 2019 should ease the pain – if it happens. 

Wafer thin

Photonics wafer revenue growth for the full year is now expected to be 11%, down from previous estimates of 35%-50% but again, 2019 looks brighter, with revenue growth expected to return to guided levels of between 40% and 60%.

Chief executive Drew Nelson says its Photonics business is building a wide customer base across multiple chip manufacturers, and customer diversification will produce better-balanced demand. I hope the group isn’t too dependent on Apple, as a number of its suppliers have issued profit warnings after iPhone sales disappointed. IQE is too risky for me but others remain convinced it offers long-term value.

Van men

Investors in van hire specialist Northgate (LSE: NTG) have had a bumpy drive since its share price peaked at 633p three-and-half-years ago against just 385p today. Today the group published interims for the six months to 31 October, but its share price has barely moved in response to a mixed set of figures.

Northgate posted continuing strong growth in the number of vehicles on hire in the UK and Spain, up 12.7% and 13.2% respectively. However, improved margins and reduction in capex due to its fleet optimisation policy were offset by a 7.4% drop in statutory profit before tax to £28.7m.

Turning round

CEO Kevin Bradshaw said Northgate is continuing to turn things around after making difficult strategic decisions in the second half of last year. “Consequently, despite strong revenue growth, our margins, profits and ROCE are lower, as expected, compared to the first half of last year.” He remained confident, about the positive trajectory of the business, which is on track to meet its full-year expectations.

Northgate, which has a market cap of £516m and operates a fleet of around 100,000 commercial vehicles, is yours for a knock-down valuation of just 10.3 times earnings. Roland Head is still pinning his hopes on a turnaround, and may have a point with earnings forecast to rise 8% in the year to 30 April 2019, and 16% the year after. The yield is currently 4.7% with cover of 2.1, rewarding you while you wait.

Capital Gains

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Northgate. 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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