Governments around the world and bodies such as the World Health Organisation have reported a rising tide of cyber scams targeting pandemic fears. A scary prospect for everyone, but an opportunity for cybersecurity firms to step up and provide solutions.

Cybersecurity stocks in the spotlight

One such firm is cybersecurity software provider Kape Technologies (LSE:KAPE). 

Kape is attempting to address this mounting problem with software that protects your identity and your data. Kape bills itself as “the first truly global privacy and security company owned by the public.” Its offerings include VPNs Cyber Ghost and ZenMate, Intego security software for Apple products and Restoro Technology to clean up Windows operating systems.

After crashing over 30% in March, the Kape share price has climbed 63%. During this time, its price-to-earnings ratio (P/E) has skyrocketed to 148. This indicates a lot of positivity and may make it a speculatively overpriced buy. However, the mass shift into home working has boosted demand for Kape’s digital privacy software. Personally, I think it will continue to see demand for its suite of products grow.

Kape’s earnings per share (EPS) are 1p and it has no dividend. It has a 4% operating margin and 22% debt ratio. The share price saw a high of £2 in February from a low of 64.5p back in August. 

Defence against the dark arts

Another company operating in this space is Aerospace and Defence group Cohort (LSE: CHRT). One part of its business is cybersecurity and secure networks, operating under its MASS subsidiary. MASS works with law enforcement agencies ensuring critical and sensitive information infrastructure is protected.

The independent technology group has five divisions, but a sixth is in the pipeline as it’s in agreement to purchase naval sonar systems provider ELAC Nautik by the end of June. ELAC focuses on defence exports bringing Cohort into the German domestic market. 

The Cohort share price is up 45% in the past year, although it has dropped year-to-date. The company has a P/E ratio of 42. It offers a 1.6% dividend yield and EPS are 13p. From the March stock market crash, the Cohort share price fell 21%. It has now regained 28%.

Are these good tech stocks?

Privacy is something increasingly lacking in modern society. With our thoughts, conversations and actions taking place more publicly than ever before, this lack of privacy makes us vulnerable to exploitative behaviour. As time goes on, I think more and more people will strive to protect their privacy. This will increase demand for the necessary technology. Likewise, businesses will want to protect their data and personnel.

These cybersecurity stocks are listed on AIM and I believe a £500 investment in either of them would be a good addition to a Stocks and Shares ISA. I think both these tech stocks are a good buy, but be mindful they are speculative buy too because each P/E is very high.

A touch of Warren Buffett’s philosophy

The firm’s strategy revolves around the theory that small and medium-sized enterprises (SMEs) can flourish within the umbrella of a larger organisation. There’s a touch of Warren Buffett’s philosophy in that approach, in my view. Buffett is known for giving the businesses within his Berkshire Hathaway conglomerate a great deal of autonomy. He hires good managers and lets them get on with it. As long as the cash keeps rolling in, and the enterprises remain prosperous and ethical in their dealings, he’s happy.

Cohort owns five businesses: Chess Technologies offers systems for detecting, tracking, classifying and disrupting naval, land and air threats; EIDmakes advanced communications systems for the defence and security markets; MASS focuses on electronic warfare, information systems and cybersecurity; MCLdesigns and integrates communications and surveillance technology, and offers support and training for UK end-users including the Ministry of Defence (MOD) and other government agencies; and SEA is an electronic systems and software house operating in the defence, transport and offshore energy markets.

The directors insist that each business has “high growth potential.” But last year, Cohort said “strong” pressures on public expenditure in the UK and “in many other markets” were keeping demand for the firm’s services suppressed. Nevertheless, the outlook statement was upbeat with the directors saying that there was a concentration of opportunities for the year ahead that was larger than normal.

A decent outcome and a positive outlook

So here we are a year later and it’s interesting to see how trading actually panned out for the company over the 12-month period to 30 April. Today’s full-year report reveals to us that revenue rose 10% compared to the year before, adjusted earnings per share shot up 16%, and the order book grew 84% to almost £190m. Cohort has been trading well, helped by a better-than-expected contribution from its December 2018 acquisition of a majority stake in Chess Technologies.

The directors slapped 11% on the total dividend for the year, signalling a decent outcome against last year’s expectations. Indeed, the company won “all” the large order opportunities it pitched for, “both renewals and new.” It seems to me that Cohort is good at delivering surprises to the upside for shareholders, and in one reassuring measure, it has managed to increase the dividend every year since it arrived on the stock market in 2006.

Cohort also announced today the winning of a £4.79m contract to supply services for Electronic Warfare Operation Support (EWOS) to an export customer. Operational progress continues at pace, and there is plenty of reason to expect the “strong” order book and pipeline of order prospects to deliver further gains in the year ahead.

At 430p, the share price is just over 20% higher than it was around this time last year, which throws up a forward-looking earnings multiple a little below 12 for the current trading year and an anticipated dividend yield around 2.4%. To me, the stock remains attractive.

Defence specialist Cohort (LSE: CHRT) is a small-cap engineering business with a share price that has skyrocketed in recent years.

Cohort’s biggest revenue stream comes from defence and security subsidiary companies based in the UK and Portugal, with the majority coming from maritime combat and tactical communication systems.

Subsidiary strength and expertise

Cohort has four subsidiaries, each of which was acquired to bring combined expertise into a collaborative environment. Ensuring the expert guidance and financial stability from above actively encourages each division to thrive. So far, this has proved an excellent business model.

One reason being is that the Cohort directors previously had track records working for the Ministry of Defence (MoD), military or defence contractors. This provides the clout required to open the necessary doors for the subsidiaries, who may not otherwise succeed in winning lucrative contracts.

The four main subsidiaries are: EID, a Portuguese high-tech company specialising in tactical and naval communications; MASS, providing expertise in system engineering, electronic warfare and cyber security to military operations; MCL, a supplier of advanced electronic communications, intelligence, surveillance and reconnaissance; and finally, SEA, a major supplier of sub-sea engineering and software design services to the defence and security markets.

More recently, in December 2018, Cohort gained a fifth acquisition through a majority stake in UK-based Chess Technologies.

Chess provides innovative surveillance and fire control system capabilities to renowned customers such as BAE Systems, Lockheed Martin, the MoD, QinetiQ and Thales.

Increased revenue share

In 2018, EID increased its revenue share by 19%, whilst Cohort increased its ownership of EID to 80%. MASS increased revenue share by 15% and MCL by 18%. SEA let the side down with weaker results and a revenue share drop of 15% but restructuring plans are underway to improve its performance going forward.

Overall Cohort achieved a record profit of £15.6m, a £1.1m increase from 2017.

The dividend has increased steadily over the past few years and currently sits at 5.65p. With a price-to-earnings ratio of 14.92, I think it’s a good time to be building a position in the stock.

One concern for investors was that Cohort reported a 30% reduction in order intake in the year to April 2018. Five orders, including new overseas orders and the renewal of an eight-year £50m MoD contract, have since been secured. 

Product development and exporting

An encouraging aspect of Cohort is through its most recent acquisitions, MCL in 2014, EID in 2017, and Chess in 2018, which are product-focused and export-orientated. This is a clever move because governments, the military and the MoD all face tightening budgets, which is forcing them to cut outside support in areas such as consultancy and training, whilst remaining dependent on the private sector for equipment. Consultancies tend to be more difficult to grow profitably, than companies selling products, especially abroad. Personally, I think this will help secure Cohort’s long-term success.

Cohort will be announcing its final results for the year ended 30 April 2019 on Tuesday 2 July. In my opinion it’s a great stock for steady growth and income.

One of my favourite small-cap stocks is rail and transportation data specialist Tracsis (LSE: TRCS). Shares in this £179m software firm have risen by 252% over the last five years, compared to a gain of just 18% for the FTSE 100.

Tracsis shares were up again on Tuesday, gaining 10% after the company said that profits for the year ended 31 July were expected to be ahead of market forecasts.

The company’s products and services are designed to help transport operators monitor and manage their resources. Examples include data collection from road and rail infrastructure, traffic monitoring, rail crew rostering and a wide range of other specialist services.

Why I like this so much

One of the company’s strengths is that many of its services are quite ‘sticky’. Competition is limited and once a service is installed, it becomes difficult for the customer to switch to a rival provider.

In fairness, another of Tracsis’s strengths is that it seems to be very good at what it does. So customers don’t want to leave very often.

The company’s business has expanded through a mix of organic growth and targeted acquisitions. Net profit has risen from £2.1m to £3.7m over the last five years. The group has also consistently maintained a net cash balance. This rose from £15.4m to £22m last year, demonstrating the strong cash generation of this business.

After today’s gains, I estimate that the shares trade on about 25 times forecast earnings. This isn’t cheap, especially as the dividend yield is less than 0.5%. But the growth record of this business suggests to me that it should continue to deliver. Although I’d prefer to buy on the dips, this stock could still be a good long-term buy.

Defensive profits

My next stock is a small-cap engineering business whose share price has doubled over the last five years.

Cohort (LSE: CHRT) is made up of four engineering companies operating in the defence and industrial sectors. Each firm retains a high degree of independence but benefits from a network of financial support and opportunities to share information.

This conglomerate business model is unfashionable these days. But Cohort’s track record suggests to me that, with good management, it can be very effective. The group’s adjusted operating profit rose by 7% to £15.6m last year, while its operating margin increased from 12.8% to 14%.

Net cash rose from £8.5m to £11.3m and shareholders enjoyed a 33% hike to the total dividend, which was lifted to 8.2p per share.

Order book growth?

One disappointment was that Cohort’s order book fell by 25% from £136.5m to £102.5m last year. The company says this was down to delays rather than a shortage of opportunities, and expects a high level of bidding this year.

Analysts covering the stock are taking a cautious view and have pencilled in a 4% increase in earnings for 2018/19. This may not seem very impressive, but the shares currently trade on just 12.5 times forecast earnings and offer a 2.3% yield.

In my view, this valuation suggests that the stock is priced for bad news. I believe good news is more likely. If I’m right, the shares could perform strongly from here. I rate them as a buy.

The firm operates in the defence sector and markets related to that, an area in which trading conditions have been tough for some time. Yet Cohort has been holding its own and delivered some impressive dividend increases over the past few years:

The dividend has grown more than 95% over four years, which is impressive, and I think there’s much more to come. Cohort’s strategy is based on the core belief that small and medium-sized enterprises (SMEs) can prosper when they are in a larger group. The firm owns four “innovative, agile and responsive” businesses (EID, MASS, MCL and SEA), which each have “high growth potential.”

A difficult trading environment

However, in today’s full-year results report, Cohort said that although the international and domestic security environment calls for greater resources to be devoted to defence and counter-terrorism in the UK and other countries, “strong” pressures on public expenditure in the UK and “in many other markets” are keeping demand for the firm’s services suppressed.

But today’s figures don’t look too bad. Revenue was broadly flat for the year compared to last year and adjusted earnings per share moved up just over 7%. The closing order book moved down 25% to £102.5m, but chairman Nick Prest said that it “provides a reasonable underpinning for the current year” when considered alongside contract wins since the end of the trading year and the firm’s pipeline of prospects. Lower order intake arose during the year because of “delays rather than losses or a lack of opportunities.”

Confidence in the outlook

Looking ahead, the directors said that there is a larger-than-normal “concentration of opportunities” for the current year and they expressed their confidence in the outlook by pushing up the total dividend by 15%, which I reckon is a figure worth noting.

City analysts following the firm expect earnings to increase 2% in the current year and 1% next time. Meanwhile, at today’s share price close to 357p, the forward price-to-earnings (P/E) ratio for 12 months to April 2020 sits just under 12 and the forward dividend yield is a little higher than 2.7%. Those forward earnings should cover the payment a healthy-looking three times or so.

It would be hard to make a case for the firm being overvalued and I think if trading conditions improve in the future and forward earnings estimates crank up, we could see an upwards valuation re-rating materialise. Meanwhile, with the firm’s operations ticking over in the current trading environment, I reckon it’s worth collecting that rising dividend while we wait.

The fruits of the company’s endeavours are divided between two divisions: TriConnex, which creates and connects energy, water and fibre networks for the residential and commercial sectors; and Tamdown, whose services include building highways and drainage systems for the same sectors.

The fact that Nexus provides such essential building works offers a clear layer of earnings visibility. Indeed, even in the current patchy climate for the domestic construction industry it continues to add new business. The firm announced this month that its order book stood at £225m as of the close of February, an 11% improvement from levels seen just three months earlier.

But this is not the only reason to be confident over future profits generation thanks to its robust position within the country’s building sector. Nexus customers include nine of the country’s 10 biggest housebuilders, and with erection rates set to keep rising thanks to the UK’s yawning supply shortage, the company can look forward to sustained revenues expansion from this one segment.

Nexus is expected to throw out a 14% year-on-year earnings improvement during the year to September 2018, and to follow this up with a 17% rise in the following period.

This leaves the AIM-quoted business dealing on a forward P/E ratio of 11.7 times, and a corresponding PEG reading of 0.8. Dirt cheap on paper, this is eye-poppingly low for a stock with as excellent a long-term profits view as Nexus.

Defence dynamo

Cohort (LSE: CHRT) is another business that those seeking dependable profits growth in the years ahead should pay close attention to.

The defence sector is a traditional safe haven for those seeking profits growth over a sustained period. Contract timings may sometimes be lumpy and result in a little earnings turbulence now and again. But over a long-term time horizon, broader armaments demand moves relentlessly higher, reflecting mankind’s desire to wage war as well as to protect itself from external threats. And this in turn supports steady sales growth for the sector’s major players.

And while the UK defence sector may have experienced no little pressure more recently, Cohort has managed to overcome the worst of these problems by concentrating on key focus areas like submarine building and cyber security, on which the government continues to spend vast amounts.

Cohort itself boasts a long record of unbroken annual earnings expansion and City analysts expect this record to continue with rises of 4% and 6% in the years to April 2018 and 2019 respectively.

This leaves the business dealing on an ultra-low forward P/E multiple of 11.8 times. Given its terrific record of relentless earnings growth, not to mention the possibility of fresh M&A action now that its EID and MCL units have been fully welcomed into the fold, I reckon this makes the business look particularly cheap.

Strong underlying gains

When a company is going through a major period of change, adjusted accounts showing only continuing operations can be very useful for investors. These numbers provide a snapshot of progress that strips out all the ‘noise’.

Today’s 2017 accounts from TT Electronics (LSE: TTG) are a good example. This £350m electronic component manufacturer sold its transportation division last year in order to focus on its higher margin product lines such as current sensing, circuit protection and signal conditioning.

TT’s figures for underlying performance show sales from continuing operations rose by 8% to £360m last year, while operating profits measured on the same basis rose by 18% to £24.3m. Adjusted earnings per share were a whopping 40% higher, at 10.9p.

When profits rise faster than sales, this usually indicates rising profit margins. That certainly seems to be happening here. The group’s operating margin from continuing ops rose from 6.2% to 6.8% last year. Return on invested capital, one of the company’s preferred measures of profit, rose from 9.2% to 10.6%.

More change coming

Last year’s disposal left the company flush with cash, and this hasn’t been left idle for long. In February, TT announced it had made a successful offer to acquire specialist electronics maker Stadium Group for a cash payment of £45.8m, plus net debt of £11.8m.

Today’s accounts show net funds of £47m, suggesting that the acquisition will leave the firm with a modest net debt position. That doesn’t concern me, given the group’s stable profits and the potential for cost savings when Stadium’s operations are integrated.

Analysts’ forecasts for 2018 put the stock on a P/E of 18, but I expect these estimates to rise when the Stadium acquisition completes and TT’s management provides updated guidance. I’d rate TT Electronics as a long-term buy at current levels.

A stealth growth stock

One company you may not have heard of is Cohort (LSE: CHRT). The group owns a selection of engineering, software and consultancy businesses which operate mainly in the defence sector.

Areas in which the group operates include cyber security, electronic warfare, communications and surveillance. The logic behind Cohort’s expansion seems to be that the companies it buys will enjoy cross-selling opportunities and access to new markets as part of a larger group.

I can see the case for this, although the evidence so far is somewhat mixed. The group’s operating profit margin has fallen from 11.8% in 2013 to just 0.9% last year. Return on capital employed has slumped from 14% to 1.2% over the same period.

A turning point?

In fairness, I think these isolated numbers probably mask a more attractive picture. The group’s acquisitive growth has been funded without issuing a lot of new shares, and while maintaining a net cash balance.

However, there’s no doubt that progress will be required to justify a higher share price. Analysts expect the group’s adjusted earnings to rise by 6% to 29.1p per share this year. That puts the stock on a forecast P/E of 12.7. There’s also a prospective yield of 2.2%.

This valuation seems about right to me, but if you view this as a long-term growth story, then the shares could be worth considering.

Historical highs

Less than a decade ago shares in AIM-listed Scapa Group (LSE: SCPA) were changing hands for less than 10p each, but after delivering very strong and sustained levels of growth over the years, they now trade at more than 40 times that value. In fact, for a brief moment last summer, the share price closed above the 500p mark for the first time in the company’s history, before drifting lower to today’s levels around 470p.

The group based in Ashton-under-Lyne, near Manchester, is a global supplier of bonding solutions and a leading manufacturer of adhesive-based products for the Healthcare and Industrial markets. The company has a truly global footprint with manufacturing sites right around the world, with the vast majority of sales coming from within Europe, North America and Asia.

Geographic ‘insulation’

This wide geographic spread has somewhat insulated the company from many of the uncertainties that have made the current environment very challenging for many of its peers, particularly the effects of recent currency fluctuations and the as-yet-unknown longer-term impact of Brexit.

From a valuation standpoint, the current share price translates into an expensive-looking price-to-earnings (P/E) multiple of 27 for the current fiscal year to March. But with City analysts forecasting more double-digit rates of growth in the coming years I think the shares are well worth that premium price tag.

Electronic warfare

If Scapa’s pricey-looking valuation is still a little too rich for your taste, then fellow AIM constituent Cohort (LSE: CHRT) might be better suited to your palate. The Reading-based technology group also saw its shares take a little breather in 2017 after an impressive run that led to a sixfold increase in its market capitalisation in as many years.

The group currently operates four innovative, agile and responsive businesses based in the UK and Portugal, which provide a wide range of services and products for domestic and export customers in the defence and security markets. Particular areas of focus include electronic warfare, cyber security, surveillance technology, and advanced communications systems.

The group’s shares have fallen back from last year’s all-time highs of 462.5p and now look to be offering greater value at 12 times earnings for the current year to April. For this reason Cohort is currently my top pick from the defence and aerospace sector.

The defence giant advised Wednesday that revenues dipped 10% in the six months to October, to £44.8m, while adjusted operating profit ducked 8% year-on-year to £3.6m. On top of this, it said order intake fell to £39.2m from £40.5m previously, and that its closing order book was down to £132.1m from £136.5m.

However, I see no reason for alarm yet. Chairman Nick Prest said: “In recent years the Group’s results have been heavily weighted towards the second half and we expect this pattern to be repeated this year. The closing order book and recent order wins support this outlook.”

Growth story goes on

Earnings have increased at a compound annual growth rate of 9.3% during the last five years, and the AIM-listed play is expected to keep this run going with rises of 4% and 6% in the years to April 2018 and 2019 respectively. And I believe the potential for M&A  should keep earnings on an upward tilt.

Despite its bright earnings picture, Cohort can still be picked up for a song, the firm trading on an ultra-cheap prospective P/E ratio of 10.9 times.

And against this backcloth, analysts are expecting dividends to keep growing at a terrific rate, with last year’s 7.1p per share payout anticipated to rise to 8.2p this year and to 9p in fiscal 2019. Consequently Cohort rocks up with decent yields of 2.6% and 2.8% for this year and next.

Read all about it

Retail star WH Smith (LSE: SMWH) is another share with a distinguished earnings record and which, thanks to rapid expansion at its Travel division, looks on course to keep on delivering plump profits growth.

Earnings have swelled at a compound annual growth rate of 8.7% during the past five years which, while not spectacular, is still pretty impressive given the hard work the newsagent has had to undertake to turn around its troubled high street arm.

It has doubled-down on cost-cutting here in the face of ongoing sales pressure. So while like-for-like sales across its high street stores dropped 4% in the 12 months to August, the £12m worth of cost savings helped trading profit remain stable year-on-year at £62m.

And with further expense slashing to come, and the business improving space management and product mix in its stores, the outlook here continues to improve.

But as I say, it is the terrific sales potential of WH Smith’s Travel unit which really promises to churn out exceptional profits growth in the years ahead. Total sales here jumped 9% in fiscal 2017. And with the FTSE 250 company continuing to increase its international footprint (it saw an extra 414 units on foreign soil last year), and traveller numbers continuing to steadily rise, I am expecting the top line to keep sprinting higher.

City analysts agree, subsequently predicting an extra 5% earnings rise in fiscal 2018. And like Cohort, with profits expected to keep moving skywards, its progressive dividend policy is anticipated to keep rolling too. Last year’s reward of 48.2p per share is predicted to move to 51.6p in the present period, resulting in a chunky 2.3% yield.

I reckon WH Smith’s exceptional growth prospects make it a terrific pick today and worthy of an elevated forward P/E ratio of 20.1 times.

With that in mind, FTSE 100-listed Micro Focus (LSE: MCRO) could be worth buying and holding for the long run. Its dividend and share price growth could be relatively high.

Improving performance

In the last five years, global software company Micro Focus has delivered highly consistent earnings expa. In fact, its bottom line growth rate has been 14% per annum during the period, with rises recorded in four of the five years. This shows that the company offers a degree of consistency as well as the potential for high growth.

During the same time, dividends have more than doubled. This shows that the company has had sufficient cash flow available to reinvest for future growth. Last year, shareholder payouts were covered 1.6 times by profit. This shows that they remain affordable even after such a sharp rise in recent years. This suggests that more dividend growth could be ahead, and that the rise in shareholder payouts may continue to outpace earnings increases without hurting the company’s financial standing.

Positive outlook

Following the acquisition of HPE, Micro Focus appears to have improved growth potential. It also has a more diverse and potentially less risky business model. In the current year its bottom line is forecast to rise by 20%, followed by further growth of 13% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.4. Given its size, scale and strong position in key markets, this seems to be a very attractive price to pay.

Looking ahead to its dividend, the company is expected to record a rise of 9% next year. Since this is three times higher than the current rate of inflation, it suggests that even with a dividend yield of 2.6% today, the company could become a sound income stock over the long run.

Further growth

Also offering high dividend growth potential is independent technology group Cohort (LSE: CHRT). It reported an acquisition as well as a trading update on Monday. It has acquired a further 23.09% of EID for just under €4m. This brings its total holding to 80%, with the Portuguese government holding the remaining 20% of the supplier of advanced electronics, communications and command and control products.

Cohort is on track to meet expectations for the full year. The company is forecast to deliver a rise in earnings of 4% this year, followed by further growth of 6% next year. This puts it on a PEG ratio of 1.7, which suggests it offers good value for money. And with dividends due to rise by 10% this year and yet still set to be covered over three times by profit, the company’s forward dividend yield of 2.9% could become very attractive in the long run.