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Questor: there’s still a bright future for these two stocks after their 300pc gains

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·4-min read
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Electric car graphic
Electric car graphic

A quadrupling in the share price of two of our holdings since their first appearance in the Questor column shows the potential of Aim when things go right (we also know to our cost what can happen when they don’t, as with our total loss on Conviviality in 2018).

Admittedly one of these two stellar stocks, Gamma Communications, has gained “only” 185pc since its addition to our IHT Portfolio in January 2018 as opposed to its recommendation to the wider readership 14 months previously, since when it has gained 307pc.

The other, Volex, has delivered a 315pc gain since we tipped it for its tax benefits in August 2018. Both have updated investors on trading recently.

Update: Volex

Volex, which makes cable assemblies for applications such as medical equipment, electric vehicles and data centres, has enjoyed a spectacular recovery in recent years and the good news just keeps coming.

In a trading statement last week it said sales for the year to April 4 would be at least $440m (£318m) while underlying operating profit was expected to be at least $41m, “ahead of the most recently guided range”. Last year’s figures were $391m and $32m respectively, which makes for increases of 12.5pc and 28.1pc.

The performance of its products for electric vehicles was particularly impressive: sales grew by 187pc compared with the previous year as the company “expanded our customer base and product offering in this market”.

“There has also been an overall stabilisation in demand from our core medical and industrial markets as well as healthy year-on-year growth from data centre customers as the trend towards home working continues,” the firm added.

Volex also delivered “strong year-on-year margin growth” and said it would recommend a final dividend of at least 2.2p, compared with 2p in 2020.

It strikes this column that the growth of the business is keeping pace with the rise in the share price: the forecast price-to-earnings ratio of 19.5 does not seem excessive.

Analysts at Stifel, the stockbroker, said: “The group clearly has momentum going into 2022. We are attracted to Volex’s end market drivers, with the benefit of both improving core medical and industrial demand plus the structural change in the EV market.”

Questor says: hold

Ticker: VLX

Share price at close: 343p

Update: Gamma Communications

Last month’s annual results from Gamma, which provides communications services to business customers in Britain and Europe, were also impressive.

Sales grew by 20pc to £394m, pre-tax profits gained an enormous 66pc to £75m, helped by “exceptional items” of almost £20m, and cash generated by operations rose by 30pc to £70.3m (reassuringly: Questor does not like to see cash flow fail to keep up with sales and profits), while adjusted earnings per share gained 26pc to 40.8p and the annual dividend was raised by 11pc to 11.7pc.

Over the past year or so the company has made five acquisitions for a total of £100m, all paid for by internally generated cash flow. It acknowledged that acquisition activity had been “high” but said it was the most cost-effective way to take advantage of acceleration in the uptake of “UCaaS” – unified communications as a service – in continental Europe.

It expects 19pc annual growth in UCaaS sales (measured by the number of workers who use the service) over the next five years, compared with a pre-pandemic estimate of 11pc.

Analysts at Numis, the stockbroker, said: “Gamma’s growth prospects remain excellent. It traded very well through the Covid-19 crisis because of the continued high quality of its products and execution, its robust recurring revenue model and the fact that its offerings enable businesses to work remotely.”

Questor says: hold

Ticker: GAMA

Share price at close: £18.18

Update: Questor Wealth Preserver

A number of readers got in touch in response to last Friday’s Wealth Preserver, in which we advised them to invest in gold and Bitcoin, to ask how they should buy those assets. We lacked space to go into this in the column but will cover it in the next Wealth Preserver, in two weeks’ time.

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.

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