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Which stock posted an 11-fold surge in profit and is a screaming buy?

There’s a microcap stock that’s just posted an 11-fold increase in net profit that is still under the radar of most investors.

I am not talking about a speculative drug or technology developer. I am referring to hospital equipment supplier Paragon Care Ltd. (ASX: PGC).

There’s plenty to like about Paragon Care’s result although you couldn’t tell from today’s market reaction with the stock sinking 2%, or 1 cent, to 46 cents.

I am not surprised at the weak market reaction even as investors sent shares in Ramsay Health Care Limited (ASX: RHC) and Japara Healthcare Ltd (ASX: JHC) surging higher today on the back of pleasing results.

Ramsay delivered a 21.3% increase in net profit and Japara posted a 13.8% lift in revenue.

Sure, Paragon’s profit is coming off a low base of $70,000 in the first half of 2013-14, so the 1,044% surge to $840,000 in the six months to end December last year may not impress some, particularly given the tax benefit received.

However, make no mistake there is strong underlying growth in the business as earnings before interest, tax depreciation and amortisation (EBITDA) jumped four-fold to $1.6 million.

First half sales are up 65% to $13.5 million and management upped its fully franked interim dividend by 20% to 0.6 cents a share.

I am expecting the strong growth momentum to continue due to organic growth and acquisitions.

What’s more the second half should see even an even stronger performance with management forecasting full year revenue of between $30 million and $33 million and EBITDA of $3.5 million to $4 million.

This compares to Paragon’s 2013-14 revenue of $19.4 million and EBITDA of $1.8 million.

As to why you shouldn’t be taken aback from today’s lacklustre market reaction to Paragon Care, the stock has run up 42% over the past year and I am expecting it to take a breather before heading higher.

Is the stock looking fully valued after the big run? Paragon Care is trading on an estimated 2014-15 price earnings (P/E) multiple of around 15-16x when the healthcare sector is on a P/E well in excess of 20x.

The discount to the sector will likely widen given the growth projection for Paragon Care and investors are paid to wait as the stock is on a trailing yield of about 4.1% once franking credits are included.

Use any dip in Paragon Care’s share price as a buying opportunity. This stock is heading higher.

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Motley Fool contributor Brendon Lau owns shares in Paragon Care, Ramsay Healthcare and Japara. Follow me on Twitter (https://twitter.com/brenlau)

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