Growth stocks can provide huge returns for investors and some don’t just rise steadily, they provide explosive growth. But which are the best? Today I’m investigating if you really should be buying these two in-favour shares.
Bubbling up
Fevertree Drinks (LSE: FEVR) has been one of the most successful stocks on the London market in the last two years. Since the company had its initial public offering in November 2014 the shares have risen by a whopping 470%. Interim results released in July are evidence of the explosive growth this stock has seen. Revenue was up 69%, earnings per share was up 89% and the interim dividend was almost doubled to 1.54p.
Many investors have been put off the stock by the high price-to-earnings ratio and minuscule dividend yield. However, paying 83 times earnings for a growth stock like Fevertree isn’t completely unheard of. Many of the highly successful tech companies in the US have traded on price-to-earnings ratios of over 80.
With its growth potential, City analysts seem to think that Fevertree is fairly valued at the current price. This would seem to be a viewed held by the founders of the company too. Both Charles Rolls and Timothy Warrillow sold shares this year netting a cool £17.7m between the two of them. Yet this to me is a bit of a red flag to be honest and I would be wary if the founders sell further shares any time soon.
Low cost production
Ithaca Energy (LSE: IAE) has been recovering well this year after a tough time in 2015. The shares are up 172% since 1 January this year and show no signs of stopping anytime soon. The recently released Q3 operational update shows that Ithaca is continuing to lower costs and work on asset profitability. The company produced 9,900 boepd (47% liquids) which was ahead of the 9,000 boepd target for the quarter.
The key value lever for Ithaca in the short term is first oil at the Stella field in the North Sea. First oil is expected in November and a rapid ramp up in production should see the company reach an annualised production rate of approximately 16,000 boepd. This should drive the operating cost per barrel below the $20 mark and boost revenue and profits. In August, CEO Les Thomas said “production is running ahead of guidance, operating costs have been further reduced and we have continued deleveraging the business.”
Ithaca has performed very well in the first half of 2016 and in the next few months the much anticipated Stella field will come online. First oil has been delayed multiple times but next year should be transformational for Ithaca. It plans to continue to pay off debt and deleverage the balance sheet. This plan should be good for shareholders as the business equity price should increase if oil stays above the $45 per barrel mark.
