Spectra Systems (LON:SPSY) was pitched to the Stockopedia Investment Club on the 7th of January 2021, at a share price of 185p.

This is a patent-backed authentication materials company that spends millions every year on ground breaking research and development, founded and run by an ex-NASA laser scientist who also owns 5% of the company.

Alongside that colourful context and growth potential, you have reassuringly solid operating characteristics: double-digit six-year profit and earnings per share CAGRs, multi-year double-digit returns on capital and operating margins, healthy dividend payouts and share buybacks, and strong free cash flows.

So is Spectra the next big thing, or could this promising company fail to meet expectations in the years ahead?

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Summary

Bull Points - it's a high QM profitable, cash generative, dividend paying small cap with high ROCE and margins; intellectual property, patents, and trusted long-term relationships with clients; strong R&D track record and scope for additional products; positive news flow of contract wins and market expectation beats.

Bear Points - Its products and businesses can be hard to understand; significant customer concentration; potential for delays to contracts; could fail to realise growth potential; subjective revenue recognition policies.


Profile

Spectra Systems (LON:SPSY) is a Speculative Small Cap High Flyer listed on the AIM market with a market cap of around £80m. It is classified as a US security, meaning certain accounts may not be able to hold these shares or might have to fill out additional forms, so check with your broker.

The group's core profit and cash engine is longer term contracts providing products and services to help authenticate and process banknotes.

Spectra supplies an impressive list of clients, including national central banks, global security printers and papermakers, nationally approved lottery operators, passport makers, and multinational consumer product companies.

Its shares are relatively illiquid, a 541 bps spread, and an EMS of 1,000 meaning you can only be sure of buying around £2,000 at the market price.

The valuation metrics are mixed, though: a forecast PE ratio of 21.9 is on the face of it justified by historical growth, but those compound growth rates are skewed by some large single-year gains, and a forecast PEG of 4.9 highlights the lacklustre projected 4.6% earnings per share growth.

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Forecast earnings growth aside, Spectra pays a useful forecast dividend of 3.58%, and its respectable StockRank…

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