Are these fast-growing stocks a buy after today’s updates?

Should investors load up with these three fast-rising stocks, or do potential problems lie ahead?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of online fashion retailer Boohoo.Com (LSE: BOO) are up by 9% to 81p this morning. In a trading update, Boohoo said it now expects sales to rise by 28%-33% this year, compared to previous guidance of 25%-30%.

This upgrade is more significant than it might seem, because of the effects of operational leverage. What this means is that as sales rises, a company’s fixed costs — such as rents — represent a smaller part of each sale, increasing profit margins.

Boohoo said today that it expects operational leverage to result in increased profit margins this year. Although no specifics were provided, I now expect current forecasts for earnings of 1.44p per share to be upgraded.

With a forecast P/E of about 50, Boohoo looks expensive. But this group is delivering profitable, cash-generative growth at an impressive rate. Today’s share price could easily look fair in a year or two’s time.

I believe existing Boohoo shareholders should continue to hold. New investors might want to wait for a short-term pull-back, in order to maximise future gains.

Is this 8.8% yield real?

Sofa company SCS Group (LSE: SCS) rose by 5% this morning, after reporting a 14.8% increase in like-for-like sales for the year ending 30 July. David Knight, ScS chief executive, said that trading was strong through the referendum campaign, and has remained so since then. Fears that Brexit could lead to a slump in sales appear to be misplaced.

Full-year profits are expected to be in line with current expectations. That suggests the firm’s dividend guidance should also remain valid.

ScS paid an interim dividend of 4.67p per share earlier this year. The company said it expected the final dividend to be roughly twice this size, implying that the total dividend for the year could be 14p.

If this guidance is maintained, then ScS shares currently offer a prospective yield of 8.8%. The firm’s half-year numbers suggest this generous payout should be affordable. At the end of January, ScS had net cash of £32.2m, or about 80p per share.

On this basis, the shares’ forecast P/E of 8 looks very cheap, notwithstanding the risk of a Brexit slowdown.

Is Neil Woodford wrong?

Top fund manager Neil Woodford has a 27% stake in business energy supplier Utilitywise (LSE: UTW). The firm’s shares rose 3% this morning after it announced the appointment of a new chief executive. But founder and current boss Geoff Thompson isn’t going far — he’s becoming the group’s executive chairman.

It’s unusual to have an executive chairman and a chief executive. The chairman’s role is normally non-executive. Mr Thompson’s sideways move also goes against corporate governance recommendations.

However, I’m more concerned about the financials. Utilitywise fell by 10% on Monday after the group warned that performance had been disappointing. Full-year revenue is now expected to rise by about 18% to “at least £82m”, compared to consensus forecasts of £90m.

Profits are also likely to be disappointing, with adjusted EBITDA expected to rise by less than 2% to £18m. One bright spot was that the group’s net debt has been repaid, suggesting cash flow is improving.

However, rising sales and flat profits suggest to me that profit margins are falling. Although the shares’ P/E of 6.5 looks cheap, I’d like to know more before buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »