As the current stock market bull run rages on, investors are finding it increasingly difficult to find high quality growth stocks trading on cheap valuations. The same goes for the Alternative Investment Market (AIM) where some of the larger constituents are trading on earnings multiples in their 30s, 40s and even higher.
Hidden gems
But I’ve never really been a fan of viewing the market as a single entity, I’d much rather evaluate each individual company on its own merits. The market on the whole may look overstretched, but there are still plenty of undervalued companies on the shelf just waiting to get noticed.
While it’s true that London’s junior AIM market has often been dubbed the ‘Wild West’, it can still be a great breeding ground for tomorrow’s industry heavyweights. And while investors should be extra cautious when venturing into the hidden depths of the world of small-caps, it’s very possible that careful stock-pickers can unearth some true hidden gems from among the smaller London-listed companies.
Five granted patents
One that looks particularly worthy of consideration right now is leading specialist touch sensor manufacturer Zytronic (LSE: ZYT). Operating from a single site near Newcastle, the AIM-listed firm is now a world-renowned developer and manufacturer of a unique range of optically transparent interactive touch sensor overlay products for use with electronic displays in industrial, self-service and public access equipment.
The company has been developing process and technological know-how and Intellectual Property (IP) since the late 1990s around two sensing methodologies. The first being single-touch self-capacitive, which Zytronic markets as PCT (Projected Capacitive Technology) and the second being multi-touch, multi-user mutual-capacitive, marketed as MPCT (Mutual Projected Capacitive Technology), in which Zytronic holds five granted patents.
Gaming market
Zytronic’s sensing products offer touchscreen solutions to the leisure, digital signage, retail, surfaces, banking and industrial markets. Its touch sensors are used in video jukeboxes and slot machines. The PCT touch sensors are used in a wide range of workplace applications, from medical diagnostic equipment to oil field machinery controls.
Results for the 2017 financial year showed continued growth in revenues, profits and cash generation, leading to a mammoth 39% increase in the final dividend, resulting in an overall full-year payout of 19p per share. Analysts expect the current year payout to be even more generous at 22.8p per share, equating to a healthy 4.6% yield.
But AIM investing is rarely about dividends, the primary focus being significant long-term growth. The Gaming market became the company’s top revenue-generator in 2017, taking the top spot from the Financial market for the first time in the company’s history, and this will undoubtedly be a huge growth area for the business going forward. With this in mind, I would say Zytronic’s shares currently represent exceptional value trading at 17 times forward earnings. I sense a bargain.