Growth stocks had a great year in 2016, but 2017 promises to be even better as economic growth remains robust in Europe, the US and the UK. However, it looks as if some sectors are set to benefit more than othersthroughout the year as trends that emerged during 2016 continue during the next 12 months. Tech is one such sector.
Transformational year
2016 was something of a transformational year for UKtech darlingMicro Focus (LSE: MCRO). After receivingseveral hostile takeover offers, which management quickly rejected, it struck a deal to merge withHewlett Packard Enterprise in an $8.8bn trnsactioncreating one of the largest software firmsin Britainby revenue.
The newly expanded company, which will have annual revenues of $4.5bn, will be one of the largesttech companies in the UK and one of the most substantial business software providers in the world. But the merger isnt expected to complete until the third quarter of 2017, so theres still a considerable amount of uncertainty surrounding itsoutlook for the year ahead.
Moreover, City growth projections for when the deal completes are difficult to come by and with this being the case, its likely the market is underestimating the enlarged entitys potential.
Indeed, at the time of writing City analysts are expecting Micro Focus to report earnings per share of 136p for the fiscal year ending 30 April, up 10% year-on-year. Earnings growth of 6% is projected for the year after, which seems to exclude any benefits from the HP acquisition. However, as Micro Focus has a historyof successfully integrating bolt-on acquisitions, cutting costs and widening margins, I believe these forecasts substantially underestimate the enlarged companys potential. Whats more, at present shares in Micro Focus trade at an undemanding forward P/E of 15.9 and yield 2.9%.
In demand
BAE Systems (LSE: BA) is rapidly shaking off its image as a traditional defence contractor as the firm shifts towards cyber security.
Over the past few years, BAE has put a lot of effort into pushing its cyber security techand these efforts are starting to pay off. At the beginning of 2016, the firm reported revenue at its Applied Intelligence cyber security arm grew 31% during 2015. Growth continued into the first half of 2016 with BAE reporting first-half earnings up6.1% onthe back of rising cyber security earnings as well ashigher sales of legacy defence products.
Throughout2017 that cyberbusiness should continueits rapid growth. The company recently inked a deal with Germanys top insurer Allianzthat will open up potential deals for BAE with companies that have been targeted by cyber criminals. As part of the deal, it will provide Allianz customers with instant access to its cyber defence expertise.
With the demand for BAEs cyber security offer growing, City analysts are expecting the company to report earnings per share up 9% for 2017. The shares currently trade at a forward P/E of 13.8 for 2017 and support a dividend yield of 3.6%.
Small-cap bargain?
If you’re looking for uncovered growth stocks, the Motley Fool’s top analysts have recently uncovered this hidden gem, which they’ve labelled one of the market’s“top small-caps”.
Our analysts believe that this company’s potential upside could be as great as 50%.
To uncover this opportunity for yourself all you have to do is download the Fool’s no obligation, freetop small-cap report today. Hurry, this opportunity won’t be around for long.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.