It has been a great 12 months to be an investor, reminding us all of the joy of holding growth stocks. Here are three I would consider buying today. All have delivered strong performances lately, and there should be plenty more to come
BAE Systems
Defence manufacturer BAE Systems (LSE: BA) is on the offensive, its share price rising almost 30% over the past 12 months and more than doubling over five years. Defence was a tough sector to operate in after the financial crisis, when austerity was the rage and military budgets were in the firing line. But it is a different matter today, with the West menaced by terror, Putin, North Korea and China, and military spending at the forefront of Donald Trump’s stimulus blitz.
Weaker sterling has also rallied to the flag, boosting overseas earnings once converted into pounds. Full-year revenues rose £1bn to £17.8bn, with operating profits soaring 16%.
Revenue streams also looks secure, with a £42bn order backlog, strong links to the US, Saudi Arabia avidly shopping for arms, and growth prospects in cyber security. Despite these headwinds, its valuation of 14.9 times earnings is reasonable, and the yield is solid at 3.3%, although the 2% hike in the full-year dividend was on the low side. Forecast earnings per share (EPS) growth of 9% this calendar year and 7% in 2018 suggest further growth to come.
Persimmon
Investor attitudes to the housebuilding sector have baffled me in recent months, but sense is slowly being restored. Companies such as Persimmon (LSE: PSN) took a trouncing in the wake of Brexit, yet house prices continue to rise by around 5% a year. Latest figures from the Council of Mortgage Lenders show that property remains affordable thanks to low mortgage rates, with capital and interest taking up just 17.5% of incomes, an historic low.
First-time buyers are starting to return to hit a six-year high as of February, making 36% of all purchases, according to Connells. Given the UK’s desperate housing shortage, and little prospect of an interest rate hike, house prices should stay high. Persimmon recently posted a 23% rise in underlying pre-tax profit to £782.8m, with operating margins rising to 25.7% and return on average capital employed topping out at 39.4%. Yet it trades at just 10.16 times earnings and yields 6.39%. This is one happy housebuilder.
Reckitt Benckiser
Finally to one of my favourite stocks of all, household goods company Reckitt Benckiser (LSE: RB). I cannot remember reviewing the stock without suggesting that investors should consider it a buy. It looks a little highly leveraged following its $17.9bn acquisition of US rival Mead Johnson, which lifted debt to more than four times its operating profits on an EBITDA basis. However, with free cash flow of £2bn a year, I’m not too worried about that.
Reckitt Benckiser’s pricey valuation of 24 times earning is par for the course for a company that is always in demand from investors, as is today’s low (but progressive) 2.07% yield. As if that wasn’t enough, it even offers defensive characteristics if you think the stock market is heading for a fall.
