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It's rare to find an investment with a 12-month price target showing a 45% upside based on 10 analyst reports. However, that is currently one of the top UK stocks I know, Kainos (LSE: KNOS).
The strength of this opportunity is largely dependent on the company's low cash flow growth compared to history. This has opened up a huge price drop, which has led to what I think is a significant undervaluation. However, with growth likely to pick up in 2025, I think big gains are imminent.
Greed when others fear
Investing is a controversial business. When the markets are booming, it's usually not the best time for me to buy stocks. Instead, I look for depressed prices in large companies. In other words, as an investor, I want a bargain.
The reason why this is so important is that with a lower rating, my return is likely to be higher. That is as long as I'm buying in the swing zone, which is when business prospects look like they're about to improve.
Kainos currently trades at a price-to-earnings (P/E) ratio that is 41% below its 10-year median. Its earnings per share are expected to grow rapidly, from an annual average of 8.1% over the past three years to 8.9% over the next three years.
When companies show strong growth like this, investors tend to buy more shares, which can drive up the P/E ratio. This means that I can benefit not only from rapid income growth but also from rising prices.
Dangers of power loss
Despite the opportunity here, serious investing is not a surefire way to get rich. Instead, once I buy cheap stocks on the flip side, I usually have to face some losses before (and when) my future gains start.
It is very difficult to time the market. Value investors don't try to bet when a company's stock price stops falling. Instead, they invest in the company and make sure it sells for less than it's probably worth.
Kainos shares have fallen 55% over the past three years. While I don't think they will drop much in price, I can't guarantee that. Instead, I examined the future growth prospects of the company, and I believe that it now makes a lot of sense for me to invest in it.
The rewards outweigh the risks
I always work to diversify my portfolio to protect myself from any downsides of investing in a single investment. By holding 10 to 15 non-core businesses from various locations and industries, I am protected from risk.
However, I am still actively looking for the best share I can find. Based on my research, Kainos is certainly one of the top UK tech funds on the market. Even if rising AI and automation capabilities threaten its long-term market position, I'm interested in the company for now.
It is largely overlooked, aimed at changing investor sentiment based on better growth rates through 2025, and my view is supported by a strong analyst price estimate of 45% growth in just 12 months.
What more could a foolish investor want? I might buy Kainos shares with the next spare cash I get.
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