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Rolls-Royce shares are performing really well right now. But other UK stocks are generating bigger gains for investors.
Here, I’m going to highlight an under-the-radar stock that has delivered more than twice the return that Rolls-Royce has this year. Believe it or not, this stock is trading for just 22p.
A UK cybersecurity company
The stock I want to zoom in on today is Corero Network Security (LSE: CNS). It’s a small UK cybersecurity company that specialises in solutions designed to protect companies against malicious network/server activity.
I’m kicking myself for not buying this stock when it first popped up on my radar in July. Since then, its share price has climbed from 19p to 22p – a gain of 16%.
That return is nothing compared to the year-to-date return though. This year, the stock is up a stunning 170% (versus 80% for Rolls-Royce).
Not my usual type of pick
Despite the recent gains, I’m still tempted to buy it for my portfolio.
It’s quite different from the stocks I usually buy. I usually go for large-cap companies that are very profitable.
In this case, the company is tiny (a market cap of just £114m). And it has a patchy track record when it comes to profits.
But I’m looking for some cybersecurity exposure. And what stands out to me here is that profits are expected to surge in the years ahead.
Next year, analysts expect earnings per share to jump a whopping 200% to 0.3 cents. There aren’t many companies on the London Stock Exchange with that kind of earnings growth forecast.
The reason earnings are expected to surge is that the cybersecurity company has a ton of momentum right now and is signing new customers left, right, and centre. Last quarter, it signed six new customers, taking its total for the year to 16.
For Q3, the total value of new orders secured was $6m. Meanwhile, the total value of new orders for the first nine months of the year was $20.2m.
Lots to like
Looking beyond the new customer wins and earnings growth, there are few other reasons I’m bullish here.
One is that the company now has a high level of recurring revenues. Generally speaking, recurring revenues reduce risk for investors.
Another is that, at the end of June, the company was debt-free with a net cash balance of around $8m. So, the balance sheet is strong.
Should I buy?
Now, despite the recurring revenues, earnings growth, and strong balance sheet, this is a risky stock.
Cybersecurity is a dynamic industry and threats are always evolving. Meanwhile, the company is up against rivals that have far more financial resources.
Additionally, the stock has a high valuation. Currently, the forward-looking price-to-earnings (P/E) ratio using next year’s earnings forecast is around 100. I don’t see that valuation as a dealbreaker since earnings per share are surging (the P/E-to-growth or ‘PEG’ ratio is 0.5 which suggests there’s value on offer). But it does add risk.
Overall though, I think this one looks very interesting. In the months ahead, I may end up taking a small position in an effort to capitalise on the booming cybersecurity industry.
