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Airtel Africa 

What it does: Airtel Africa provides telecommunications and mobile money services in 14 African countries. 

By Royston Wild. Airtel Africa’s (LSE: AAF) share price has slumped in recent weeks. I’d use this as an opportunity to buy a top growth stock at a discount. 

Today the telecoms business trades on a forward price-to-earnings (P/E) ratio of 6.5 times. This is far below what, say, FTSE 100 rival Vodafone trades on (the earnings multiple here sits at 10.8 times).

City analysts think Airtel’s annual earnings will rise 12% in this financial year. They are tipped to increase 11% next year, too. 

I’d buy the business to capitalise on soaring demand for telecoms and financial services products in Africa. It is the second-largest telecoms provider on the continent, and has been growing revenues and earnings by double-digit percentages for the past 17 quarters. 

Product penetration across Airtel’s portfolio remains quite low. Meanwhile, personal wealth levels in its markets are increasing sharply. I think this perfect blend should deliver excellent long-term earnings growth at the company. 

Royston Wild does not own shares in Airtel Africa. 

Somero Enterprises

What it does: Somero Enterprises designs and sells concrete levelling equipment used by construction companies worldwide.

By Zaven Boyrazian. Somero Enterprises (LSE:SOM) is a designer and manufacturer of laser-guided concrete-laying screed machines. It’s hardly the most exciting business out there, but it plays a pivotal role in the US construction industry.

With the American congress recently passing a $1trn infrastructure investment bill, management has had little trouble finding customers for its products. So, it’s hardly surprising that the group recently hit record revenues.

Despite this, Somero shares have tumbled more than 20% over the last 12 months. It seems investors are getting increasingly agitated about supply chain disruptions, which are having a significant impact on its non-US operations.

However, while frustrating, this is ultimately a short-term problem. And seeing a solid high-growth company trading at a P/E ratio of 7.3 looks too cheap in my eyes. That’s why I’m tempted to bolster my existing position by buying more at today’s stock price.

Zaven Boyrazian owns shares in Somero Enterprises.

Chemring Group

What it does: Chemring Group designs, develops, and manufactures advanced technologies for the defence industry.

By Charlie Carman. China’s rise and the Russo-Ukrainian war have boosted demand for products developed by Chemring Group (LSE: CHG). Defence budgets are expected to increase across its four home markets: the UK, the US, Norway, and Australia.

The group’s order book reached £678m in September, covering expected full-year 2022 revenues. New contracts with NATO members for the company’s countermeasures and energetics business indicate a robust manufacturing pipeline for 2023 and beyond.

Chemring’s other main arm focused on sensors and information also looks healthy. In H1 2022, this division generated 21% revenue growth and a 27% hike in operating profit.

Granted, net debt is currently £18.5m, which could limit future growth prospects. However, a 52% reduction in this figure since H1 2021 shows a positive trajectory.

In my view, significant barriers to entry in the sector contribute to the defence stock’s long-term potential, provided it remains at the forefront of developing state-of-the-art technologies.

Charlie Carman does not own shares in Chemring Group. 

Darktrace

What it does: Darktrace is a cybersecurity company, and uses AI to develop autonomous detection of cyber threats.

By Alan Oscroft. A couple of brokers have price targets on Darktrace (LSE: DARK) of around twice the current share price. I’d never buy the stock based on that, but it’s inspired me to re-examine the company.

The shares got a little overheated last year, but then crashed after some negative reports. Over 12 months, Darktrace shares have now lost around 60% of their value.

Darktrace recently reported a 46% rise in full-year revenue, with a small net profit of $1.5m. It also confirmed 2023 guidance for a 31-34% increase in annual recurring revenue. Predicted adjusted EBITDA margin is in the 15-18% range.

The company has since reported a 29% year-on-year increase in net new customers in its first quarter, reiterating its full-year guidance.

We’re looking at a forecast P/E multiple of 130 as far out as 2024. So there’s definitely valuation risk there. But I think it could be the start of sustainable growth.

Alan Oscroft does not own Darktrace shares.

Marks and Spencer

What it does: M&S is one of the UK’s biggest retailers. It specialises in selling clothing, beauty, home products, and food products. 

By John Choong. Marks and Spencer (LSE: MKS) shares are currently trading at a P/E ratio of 7. Despite the grocery industry being known for its low margins, I think M&S could be an exception and be an excellent growth stock for the long term.

It’s no secret that Marks and Spencer’s products are priced on the higher side. Therefore, it may seem contradictive to buy its stock when consumers are ‘down trading’. However, I believe that the retailer’s target market (middle and upper class) isn’t necessarily trading down in groceries. Instead, they’re trading down in eating out, and choosing to seek value in purchasing M&S’ great-tasting packaged meals. After all, Tesco indicated this trend in consumer behaviour.

With the grocer’s latest cost-savings plan and exciting lines of clothing to be launched, I think the company’s top and bottom lines should benefit over the long term as it continues to fulfil its growth plans. As such, I think M&S shares have the potential to head higher from their current levels.

John Choong has positions in Marks and Spencer.

Safestore

What it does: Safestore is a leading supplier of self-storage services in the UK and continental Europe

By Christopher Ruane. The Safestore (LSE: SAFE) share price over the past year might not suggest a compelling growth story. The shares are down 25% in 12 months.

But I think that offers an attractive buying opportunity for me to increase my stake and would consider doing so if I had spare money to invest.

In the most recent quarter, revenue grew 15% compared to the same period last year. That is part of a pattern of long-term growth I expect to continue. Self-storage continues to see growing demand in the UK. Safestore’s well-established brand can help it benefit from that. The company is developing a pipeline of new properties equivalent to around 14% of its current floor space.

A worsening economy could lead some tenants to try and cut their costs by reducing storage space. That might hurt profits. But I am upbeat about the company’s prospects and see strong growth opportunities ahead.

Christopher Ruane owns shares in Safestore.

Rightmove

What it does: Rightmove is the UK’s most popular property portal, providing advertising services to new home developers and estate agents.

By Paul Summers: Shares in property site Rightmove (LSE: RMV) have tumbled nearly 40% in 2022 as investors have become increasingly skittish over the impact of higher interest rates on the UK housing market. I regard this as an opportunity.

At face value, a P/E ratio of 21 doesn’t seem like a bargain. However, it’s far less than the five-year average of 32. This presents as an even better deal when Rightmove’s massive market share, healthy financial position, and staggeringly high margins are taken into account. 

A recovery won’t happen overnight and things could easily get worse for the stock depending on what the Bank of England decides to do about rates in early November. But it does feel like a lot of fear is already priced in.

And let’s not forget that Rightmove makes money even if the properties it lists fail to attract buyers or renters.

Paul Summers has no position in Rightmove.

Rightmove

What it does: Rightmove makes money by listing estate agents on its website and selling additional advertising products.

By Stephen Wright. My Best British growth stock to buy in November is Rightmove (LSE:RMV). I think that now could be a terrific time to add to my investment in this stock.

Right now, the UK property market is under pressure. Rising interest rates have been making mortgages more expensive and slowing down the demand for housing. 

As a result, shares in Rightmove have fallen by around 37% since the start of the year. But I’m seeing this as an opportunity. 

The company has a dominant position in an industry that typically has high margins and it generates significant amounts of cash. There might be some turbulence in the near future, but I think that the business will do well as the economy recovers.

Furthermore, the company has been buying back its own stock over the last few months. To me, this indicates that management also sees the stock as undervalued.

Stephen Wright owns shares in Rightmove.

Diageo

What it does: Diageo is a global leader in alcoholic beverages with products sold in more than 180 countries.

By Ben McPoland. Diageo (LSE: DGE) has been firing on all cylinders for many years. The British drinks giant has a portfolio of over 200 brands, including Guinness, Johnnie Walker and Baileys.

The share price is down this year, though, with the looming possibility of a global recession. Consumers, however, don’t tend to give up their favourite tipple, even during economic downturns. They are unlikely to switch from something like Johnnie Walker (the world’s most popular Scotch whisky) to a cheaper alternative. People basically put these drinks into the “affordable luxury” category.

This consumer loyalty to Diageo’s brands gives it a powerful competitive edge. And, due to its wide global presence, the company stands to benefit as disposable incomes rise in regions like Asia and Latin America.

The shares trade at a P/E ratio of 24, which isn’t particularly cheap. But I think the premium price is warranted for Diageo.

Ben McPoland owns shares of Diageo. 

The Footsie has also been pulled upwards by commodity stocks. Meanwhile, the FTSE 250 contains stocks in several industries, such as the travel sector, which have performed poorly this year.

However, for me, it’s a good place to look for lesser-known stocks with huge potential.

So, here are two stocks I’d buy for my portfolio and hold for five years.

Morgan Advanced Materials

At 252p, Morgan Advanced Materials (LSE:MGAM) is trading at a 52-week low. The Windsor-based company manufactures specialist products, using carbon, advanced ceramics and composites.

However, the falling share price belies positive signs from the firm.

In Q1, revenue increased 10.9% on an organic constant currency basis, compared to the same period last year. 

In May, Morgan Advanced Materials reaffirmed its guidance for full-year organic revenue growth of 4% to 7% in 2022. 

“We will see higher inflation in 2022 and expect higher pricing and continuous improvement to offset this,” it said. The group suggested its margins will actually expand further during the year.

I think long-term prospects are good too. The renewables sector is a key market for the company, with its products used in both wind turbines and solar panels. This is a multi-trillion dollar market that will continue to grow in line with net-zero agendas.

The company currently has a price-to-earnings (P/E) ratio of 11, and the forward P/E is even more attractive at 9.8. It’s also got a dividend yield of 3.6%.

But I’d buy this stock for the long-term growth potential, particularly as global infrastructure spending picks up in the coming years.

One concern is the effect of inflation on costs, but the company appears confident that increasing its prices won’t impact demand.

Chemring Group

Shares in Chemring Group (LSE:CHG) soared after Russia’s invasion of Ukraine, reaching pre-pandemic levels.

The business provides a range of advanced technology products and services to the aerospace, defence and security markets. 

In June, Chemring posted a rise in interim profit and revenue, increased its dividend, and backed its expectations for 2022.

In the six months to April 30, underlying pre-tax profit rose 22% to £33.1m and revenue rose 11% to £220.4m.

The dividend was lifted 19% to 1.9p a share.

It also said that around 85% of expected H2 revenue was in the order book in April, or has already been delivered.

However, I’d buy Chemring stock because of a trend towards increased defence spending around the world, in addition to the immediate increases we’re seeing now because of Russia’s invasion of Ukraine.

There are of course some risks and issues. For one, contract agreements with the US Department of Defense have been delayed and will hopefully come in towards the end of the year. It’s also worth noting that the dividend yield of around 2%, isn’t that attractive.

I think investing in defence stocks could be a good idea right now. China and Russia have been busy building their military capabilities in recent years. And Western nations are likely to keep ramping up their own spending in response.

This is a trend that looks set to continue following Russia’s invasion of Ukraine.

Strong trading

So which UK defence stocks have caught my attention? Well, following recent share price weakness, I’m considering investing in Chemring Group (LSE: CHG).

This particular business manufactures sensors to detect chemical and biological attacks. It also makes countermeasure technology such as flares that military jets release to deflect missiles.

In the six months to April, Chemring’s revenues and underlying pre-tax profits rose 11% and 22% year-on-year respectively. Consequently, the firm elected to raise the dividend 19% to 1.9p per share.

The risks

Supply chain problems represent a danger to profits at defence companies. However, delays to the awarding of contracts are a more traditional danger that can impact near-term profits.

Chemring has endured order delays this financial year due to the budgetary stalemate in Washington at the start of 2022. Business wins expected in the first half have now been pushed into the second half.

The rewards

The unpredictable nature of contract timings isn’t enough to discourage me from buying Chemring, though. I buy stocks with a long-term view and it’s my opinion that defence spending will rise strongly for years to come, driving profits at defence stocks.

Chemring also has a decent record of double-digit annual earnings growth under its belt. And this has reaped big rewards for dividend investors.

Another healthy profits increase last year prompted the firm to hike the full-year dividend 23% year-on-year to 4.8p per share. And City analysts think total rewards will soar to 5.8p this year and to 6.9p next year as profits keep rising. Forecasters reckon earnings will increase 17% and 1% in these years.

A top FTSE 250 dividend stock

It’s worth noting that Chemring’s dividend yields aren’t as big as many other UK shares. They clock in at 1.8% for this year and 2.2% for this year.

However, I think an investor can expect Chemring to make good on these near-term dividend forecasts. This is something that really appeals to me in the current economic environment.

Future dividend levels at many other dividend stocks are more unpredictable as the global economy teeters towards recession and corporate profits forecasts start to look fragile. Chemring’s operations aren’t as sensitive to broader economic conditions as many other companies.

On top of this, projected dividends are covered between 2.9 times and 3.4 times by expected earnings over the next two years. This is well above the safety benchmark of 2 times.

All things considered, I think Chemring is a top dividend stock right now. I’d buy it today and look to hold onto it for years.

Too cheap to miss?

Car retailer Motorpoint Group (LSE: MOTR) is tipped for strong and sustained earnings growth in the medium term. A 123% improvement in full-year profits is expected in the current fiscal period to March 2022. A 20% rise is anticipated for financial 2023.

Yet despite these bubbly predictions Motorpoint still trades extremely cheaply. This share trades on a forward price-to-earnings growth (PEG) ratio of just 0.1.

I don’t think this reading reflects how robust business is, and is likely to remain, at Motorpoint. Supply chain problems in the new car market are sending demand for pre-owned vehicles through the roof. The retailer in fact said that revenues and profits would come in “significantly ahead” of expectations when it last updated the market in November.

Motoring on

Fresh data on the second-hand car market has boosted my expectations of another blockbuster update when it releases its full-year trading update in early April, too. According to Auto Trader, the average price of a pre-owned vehicle has risen 29% over the past 12 months. Price increases are accelerating as the shortage of new stock worsens.

Of course, Motorpoint could suffer if a chronic shortage of used vehicles emerges and it ends up with half-empty forecourts. But this is a risk I’d be happy to accept given the company’s massively cheap share price. A combination of strong industry fundamentals and robust market share gains makes Motorpoint a top cheap stock for me to own today.

Ready for action

Geopolitical tension is at its highest for decades as Russia’s military perches outside Ukraine. Fears of fresh conflict between the West and emerging nations Russia and China have been growing for some years, though, a phenomenon which saw global defence spending rise at its fastest pace for 11 years in 2020.

Another hefty yearly increase is expected when the Stockholm International Peace Research Institute releases 2021 numbers in April. The ratcheting up of military posturing in Eastern Europe today means arms expenditure can be expected to keep rising strongly in 2022 and beyond, too.

As a result I think companies like Chemring Group (LSE: CHG) can expect demand for their goods to continue growing strongly. In fact City analysts think that this particular UK defence share will experience earnings growth of 8% and 4% in the next two financial years (to October 2022 and 2023 respectively) alone.

A FTSE 250 firework

Chemring manufactures flares and decoys which protect planes and ships from missile attack. The company sells more than half of its tech to the US, though it is also a major supplier to British and Norwegian armed forces.

It’s important to look at the dangers facing Chemring, of course. One of the main worries I have is that its critical life- and equipment-protecting systems have to be impervious to failure. Any other outcome could have disastrous consequences for Chemring’s future orders.

Still, it’s my opinion that Chemring’s undemanding valuation reflects this ever-present danger. At 260p per share, this share trades on a forward P/E ratio of just 14 times. I’d happily buy the FTSE 250 firm for my portfolio right now.

The price of the FTSE 250 defence giant flew to fresh nine-year peaks of 324.5p following the release of half-year results. It finished Thursday trading 6% higher at 324p.

Chemring’s revenues rise

Chemring announced that revenues rose 4% during the six months to April, to £198.5m. At stable exchange rates, sales improved by an even better 8%.

The FTSE 250 firm enjoyed healthy growth across both its divisions too. At Sensors & Information sales increased 15% year-on-year to £77.1m, helped by its Roke unit again enjoying “double-digit growth in orders, revenue and operating profit”. Roke provides technology, engineering and consultancy services to the government and blue-chip engineering companies.

Meanwhile, revenues at Chemring’s Countermeasures & Energetics arm increased 4% to £129.2m. It said that “good progress was made on securing new long-term contracts” here in the six months to April. These included Chemring Countermeasures USA receiving a five-year IDIQ contract to supply infrared decoy flares, and Chemring Energetics UK sealing a long-term partnering agreement with Martin Baker Aircraft Company.

Profits soar

As a consequence, Chemring’s underlying profit before tax rose 12% year-on-year to £27.2m. Stripping out the effects of a weakening dollar, profits would have been 19% higher from the same period in the previous financial year.

Commenting on the results, Chemring chief executive Michael Ord said that its solid first-half performance “again demonstrates the progress that we continue to make in building a higher quality technology-based Group.” He added that “strong order cover for the full year” means that the company remains on track to deliver annual growth in line with expectations.

Ord also noted that “whilst there may be some macroeconomic uncertainty surrounding the level and timing of defence spending as a result of the Covid-19 pandemic, our multiple market leading positions and investment in high technology niches, provide attractive growth opportunities.”

Acquisition news

In other news Chemring announced the acquisition of Cubica Group for an undisclosed sum. The FTSE 250 business said that the deal “creates further opportunities… to enhance and further accelerate growth in its Roke business.”

Based in Surrey, Cubica is a research and development specialist in the fields of artificial intelligence, machine learning, data fusion and autonomy. It provides its services primarily for defence and security purposes and its customers include the UK Government, law enforcement, and numerous international defence suppliers and private sector organisations.

Chemring chief Ord described the group’s Cubica and Vigil AI divisions as “an excellent strategic and cultural fit for our Roke business.” He added that they “offer significant additional research and development expertise as we invest in next generation technologies and expand our product, service and capability offerings.”

The FTSE 100 and FTSE 250 have flatlined in more recent days as UK share investors have taken a ‘wait and see’ approach with regards to Brexit talks. But not all London-listed companies have had the handbrake slapped on. Take Chemring Group (LSE: CHG) as an example.

The FTSE 250 defence giant has seen its share price soar 12% on Tuesday following the release of fresh financials. Chemring has recovered all of the ground lost in the stock market crash of early 2020. And it’s now 26% higher since the beginning of the year and riding high at seven-year peaks above 300p.

A robust UK share in uncertain times

Chemring has a history of beating estimates. It was at it again in midweek trading with the release of full-year results for the period ended October.

The business — which is chiefly known for its expertise in the realm of countermeasures — said revenues rocketed 20% year-on-year in the last financial period to £402.5m. This, in turn, drove underlying pre-tax profit a whopping 31% higher from fiscal 2019 levels, to £51.7m.

Chemring benefitted from not having to shutter its operations because of Covid-19 during the last year. It’s also seen customer orders continue to roll in and its order book of £436 as of October was up 6% year-on-year.

In particular, Chemring has enjoyed “strong growth” in orders and revenues at its Roke cyber security and IT division recently. And, as a consequence, this UK share has terrific visibility for financial 2021 (78% of expected group revenue this year is currently covered by the order book).

What Chemring said

So Chemring provided plenty for market makers to celebrate. But it wasn’t quite done yet. The FTSE 250 also declared the amount of net debt on its books had shrank 36% year on year to £48.2m.

This, along with its excellent profits performance last year and healthy order book, prompted Chemring to raise the full-year dividend. A total payout of 3.9p per share was up 8% from the previous year’s 3.6p.

No wonder Chemring chief executive Michael Ord sounded quite chipper in the release. He commented that the company is “well placed, with a robust strategy, market-leading positions across different geographies and sectors, and with products and services that are critical to our government and blue-chip customers. Chemring’s long-term prospects remain strong.”

City consensus suggests that Chemring’s annual earnings will decline 3% in fiscal 2021, though today’s bright update could see forecasts upgraded in the days ahead. Current estimates mean the defence play trades on a forward price-to-earnings (P/E) ratio of 20 times. A 1.5% dividend yield gives something for income investors to sink their teeth into too.

Purplebricks returns to profit

Purplebricks’ share price is up by 13% as I write, after the online estate agency reported a return to profit during the first half of the year. Management said the firm has seen “a strong market recovery”.

Although revenue fell 6% to £44.2m, Purplebricks reported a pre-tax profit for the half year of £4.3m. This compares to a loss of £2.3m for the same period last year. Adjusted profits for the full year are now expected to be ahead of broker forecasts.

Today’s results highlight some encouraging trends. Fee income rose by 6% to £49.1m. This was helped by an increase in the number of new instructions, which rose by 8% to 35,387. Average revenue per instruction rose by 3% to £1,392. This suggests that Purplebricks is not having to discount its services to win new business — good news for profits.

Purplebricks says that it now has 4.8% of the UK market and ended the half-year period with £75.8m of cash on hand. Investors are likely to view today’s results as a sign that this UK share’s growth story is back on track.

Profits flare at Chemring

Chemring’s share price is up by 12% to over 300p this morning, after the defence group reported full-year profits that were ahead of broker forecasts.

Sales rose by 20% to £402.5m during the year to 31 October. This lifted the group’s underlying pre-tax profit by 31% to £51.7m. Adjusted earnings per share climbed 35% to 15.1p, ahead of broker forecasts of 14p.

The company says that its businesses have remained open and fully operational this year, despite the impact of Covid-19. There’s been “good progress” with new orders for countermeasures, such as flares that are used as missile decoys. Recent contracts include a $107m order in Australia to support the F-35 Lightning combat aircraft.

Management said expectations for 2021 are unchanged. Chemring’s current order book covers 78% of 2021 forecast revenue, suggesting a fairly stable outlook for the year.

This UK share is rising fast

The share price of business broker K3 Capital is up by almost 10% as I write, after the firm said that trading was ahead of expectations during the six months to 30 November. As a result, management expects to report half-year revenue of £18m. That’s more than double last year’s half-year revenue of £8m.

K3 Capital’s share price has risen by 40% over the last six months. This AIM-listed company appears to be in a strong growth phase, which management said has been helped by the recent acquisition of insolvency specialist Quantuma. It added that the company has entered the second half of the year with “strong momentum”.

CEO John Rigby owns 11% of this £140m business, giving him plenty of skin in the game. Mr Rigby said that he’s continuing to look for new acquisition opportunities and is confident of further progress.

According to broker forecasts, K3 Capital’s earnings will be largely unchanged this year, before rising by 40% to 16p in the 2021/22 financial year. At current levels, that leaves this growth stock trading on 14 times 2021/22 forecast earnings.

Today, I want to take a fresh look at BAE and consider a more specialist alternative, Chemring Group (LSE: CHG). This £440m firm specialises in missile countermeasures and sensor-based protection systems.

A solid turnaround?

Chemring has been through a difficult few years. The group reported annual losses from 2013 until 2015 and raised £81m of fresh cash in a rights issue in 2016. Last year, the firm’s Salisbury factory was forced to close after a tragic incident that cost the life of one employee.

However, debt levels are now under control and the firm’s profitability has started to improve. Final results published on Thursday suggest continued progress. Although sales from continuing operations fell 3% to £297m last year, underlying pre-tax profit rose by 25% to £25m. As a result, the group declared a dividend of 3.3p, 10% higher than in 2017.

Reassuringly, Chemring’s net debt was largely unchanged last year. My analysis of the firm’s cash flow suggests that its operations are now generating enough cash to support the dividend and fund some investment in growth.

Buy, sell or hold?

The outlook for 2019 also seems encouraging. That Salisbury factory is expected to gradually reopen, boosting earnings, which City forecasts suggest will rise by 66% to 11.5p per share.

However, sales are expected to fall again this year. This suggests that rising profits represent recovery, rather than growth. On that basis, the stock’s forecast P/E of 13.7, and dividend yield of 2.4%, don’t seem that cheap to me. I won’t be buying.

BAE has done better

While Chemring has been struggling in recent years, BAE Systems has been quietly plodding ahead. The group’s critics sometimes suggest that it’s unlikely to deliver much growth, but the facts suggest otherwise.

The BAE share price has risen by 15% over the last five years. That puts it significantly ahead of Chemring (-30%) and the FTSE 100 index itself (+4%).

I’ve written before about the attractions of this diverse group. BAE’s portfolio includes ship-building, military jet aircraft, vehicles, weaponry, electronics and cyber warfare. Although revenues in some areas can be lumpy and vary from year to year, over longer periods this group is proven to be a profitable and cash generative business.

Strong cash generation is reflected in BAE’s dividend history. The shareholder payout hasn’t been cut for 20 years and has risen by 51% over the last 10 years.

A safe Brexit buy?

BAE’s customers are mostly located in the UK, USA and Middle East. So Brexit seems unlikely to have a direct effect on these relationships. There could be a risk to joint ventures with major European companies but, in my view, this is the kind of problem that tends to get sorted out in the background.

I see this FTSE 100 giant as a very solid buy for income and long-term growth. Trading on 11 times 2018 forecast earnings, and with a 4.4% dividend yield, the shares look decent value to me. I’d buy.

However, I believe this weakness is temporary and the shares are set for a near-term recovery as the group reinforces its position in the global defence market. 

Market performance 

BAE’s performance over the past year is disappointing, but the firm’s long-term record of value creation is more impressive. Indeed over the past three years, the stock has returned 10.8% per annum, including dividends, outperforming the FTSE 100 by 3% a year. It’s also registered a similar performance over the past five years. 

The recent underperformance has taken shares in BAE back to where they were at the end of 2017, suggesting the market is ignoring the City’s 2018 growth projections. Analysts have pencilled in earnings per share (EPS) gains of 18% for 2018, followed by an expansion of 9.2% for 2019. These figures suggest the stock is trading at an undemanding forward P/E of 12.7, falling to 11.6 for 2019.

That said, the City’s numbers clash with BAE’s own growth estimates. Back at the beginning of August, management told investors to expect flat earnings this year, after winning a $26bn contract to build warships for Australia.

Last year, the company reported normalised EPS of 36.4p. Based on this figure, the stock is trading at a forward P/E of 15.1. 

Best in the sector

A P/E of 15.1 is not too expensive for an international business with a steady order book, in my view. On top of the attractive valuation, the stock also supports a market-beating dividend yield of 4.2% on a forward basis. 

What’s more, BAE’s valuation is below the defence sector average. Peer Chemring (LSE: CHG) trades at a dearer 16.6 times forward earnings, and has a more mixed-growth outlook. 

After a troubled few years, beset by contract delays and restructuring efforts, analysts had expected the business to return to growth in 2018. Unfortunately, a fatal explosion at its Salisbury factory in August wrote off this expectation. Now, due to lost production and clean-up costs, EPS are projected to fall nearly 40% year-on-year. However, EPS are expected to rebound in 2019 — barring any unforeseen developments. The City is forecasting EPS of 11.7p for 2019, giving a 2019 P/E of 16.5. 

If I had to choose between these two sector peers, I would buy BAE for my portfolio over Chemring. Not only is Chemring more expensive, but the company’s business is unpredictable. Sales at the group have actually fallen by half over the past five years. 

BAE offers a much more stable growth platform with its multi-billion dollar international projects. Further, the shares are deeply undervalued compared to the rest of the global defence industry. Shares in US peer General Dynamics, for example, change hands for 18 times forward earnings. 

On this basis, I rate BAE shares a ‘buy’ as I think they’re due a near-term recovery. 

Today I’m looking at two FTSE 250 stocks that I believe could power ahead of the FTSE 100 over the coming years.

A turnaround in progress

Back in January, I tipped defence firm Chemring Group (LSE: CHG) as a potential buy. The shares rose by about 30% after that, until a serious fire at its Countermeasures factory in Salisbury caused the shares to crash in mid-August.

The group’s shares fell from 236p to under 195p following this incident, in which one person was killed and one seriously injured. However, Chemring shares have risen by more than 10% already this week, after the firm announced a major new contract win and issued an update on trading.

Work is going to gradually restart at the Salisbury factory, starting with shipments of finished orders. As the factory is rebuilt, it’s likely to be more heavily automated than it was previously. I’d expect this to result in higher profit margins over the long term.

In the meantime, Chemring has won a long-term contract to supply chemical agent detectors to the US Department of Defense. The company says this is the result of several years’ research and development. No information was provided about the value of the deal, but it was enough to send the shares up by 5%. This suggests to me that it’s expected to make a meaningful contribution to future profits.

A buying opportunity?

The fire is expected to cut Chemring’s underlying operating profit by about £15m this year. Aside from this, management says that trading is in line with expectations.

Analysts’ forecasts are for earnings per share to drop by around 18% in 2018, before bouncing back next year. This puts the stock on a 2018 forecast P/E of 20, falling to a P/E of 16 in 2019.  The group’s dividend yield is expected to rise from 1.6% in 2018 to 2% in 2019, as profits and cash flow improve.

I believe Chemring could be a good buy at this level, for long-term investors.

A safer option?

If you’re concerned about investing in a firm that’s facing significant operational disruption, you might want to consider my second choice. FTSE 250 engineer Vesuvius (LSE: VSVS) specialises in “molten metal flow engineering”.

This company makes equipment used in foundries and in the steel industry. The group’s shares have risen by 11% over the last year, compared to a gain of just 2% for the FTSE 100. Although profits dipped in 2015 and 2016, last year saw Vesuvius return to profit growth.

Further progress is expected this year. Analysts expect adjusted earnings to rise by about 15% to 47p per share in 2018. A dividend of 19.3p per share is expected, an increase of 7.2% versus last year’s distribution.

These forecasts put Vesuvius on an undemanding forecast P/E of 13.4, with a prospective dividend yield of 3.1%. In my view this could be a good example of a boring business that makes a good long-term investment. I’d consider buying this stock at current levels.