This week's two stock picks (see also: Gamble of the week: a nuclear attraction) are both small caps operating in growing markets. Although the share prices of such companies tend to be more volatile than those of large corporates, they can still offer compelling value. The trick here is to sift through literally hundreds of stocks and pick out the one or two hidden gems that can deliver substantial returns. The only drawback is that you need nerves of steel and an unquenchable thirst for research. Still, as the saying goes, no gain without pain'. And there are potentially some good gains to be made from this stock:
Tip of the week: Leadcom Integrated Solutions (Aim: LEAD, 61p), tipped as a BUY by Altium Capital
Many investors still have horrible memories of the dotcom bubble back
in 2000. A few have vowed never again to invest in hi-tech stocks and have instead ploughed their hard-earned savings into property. Their fears are understandable, but they risk missing out on some very interesting opportunities now cropping up in the technology sector.
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Along with the rapid adoption of digital/high-definition TV, VoIP (internet telephony) and wireless broadband, there are some major product launches scheduled for the next six months. Apple's iPod Video, Microsoft's Vista operating system (the follow-up to Windows) and Sony's PlayStation 3 games console, should all boost consumer demand in the coming years.
I think that this week's top tip, Leadcom Integrated Solutions, will be a beneficiary of this. Leadcom provides a comprehensive service for telecoms firms and equipment suppliers (such as Nokia) who wish to outsource the design, building, commissioning and installation of their communication networks. The firm's headquarters are in Tel Aviv and it employs around 900 staff in 40 countries.
According to research group IDC, the market for network deployment' services was worth $900m in 2005 and is expected to increase to $1.2bn by 2008, representing a 12% annual growth rate. This expansion is being driven by three dominant trends.
The first is the construction of wireless networks in emerging markets, where fixed-line telephony is simply too expensive to establish. Second is demand from Western economies, where broadband internet access is presently expanding. Third is the trend for telecoms companies and equipment suppliers to outsource to third parties such as Leadcom particularly in developing regions.
Leadcom has an impressive list of blue-chip customers, which, along with Nokia, includes Nortel, Siemens, TIM and Millicom. It also has a wide geographical spread and is winning significant new business in Latin America, Africa and Asia. New contracts have been signed this year in Argentina and the Congo, and last Monday, $10m worth of deals were announced in Brazil, Venezuela and the Caribbean. India has also been targeted for substantial future investment.
Sales for the first half of this year were $61.8m, up 32% on the same period in 2005, delivering a solid 10.5% operating profit margin. Earnings per share came in at 2.2p and are forecast to reach 4.5p this year, before hitting 6.5p in 2007. With net cash of $10.7m, a growing $80m orderbook and a healthy sales pipeline of $310m, I believe Leadcom offers good value.
As far as risks go, network deployment is undoubtedly a cyclical industry, and geopolitical uncertainties in emerging markets could cause lumpy revenue streams. However, for the time being, the sector's fundamentals look attractive and growth remains strong. And at 61p, the shares trade on a 2007 p/e ratio of 9.4, which appears far too cheap. A third-quarter trading update is scheduled for the end of September.
Recommendation: BUY at 61p (market cap £73m)
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