One growth stock I’d buy — and one I’d sell — right now

Royston Wild discusses two growth stocks with very different near-term outlooks.

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Electricals giant AO World (LSE: AO) has received a healthy 4% share price bump during Thursday trade following the release of latest trading numbers.

In a pre-close update AO World announced that trading during the 12 months to March 2017 is likely to be “in line with our range of expectations.” Revenues are expected to have pounded 17% higher year-on-year, it advised, and should come in around £700m.

If realised, this would be at the bottom of the guided range of £700.3m–£735.9m made in mid-January, however.

On a brighter note, the retailer added that it expected to report adjusted losses before interest, tax, depreciation and amortisation of between £2.4m and zero. This compares with predicted losses of between £2.4m and £4.7m affirmed two months ago.

But this was not the only cause for investors to pile in today, as AO World also announced plans to raise £50m via a share placing, funds the retailer said will be used to “support our continued growth and increasing scale as we pursue our proven strategy.”

The company has spent oodles of cash to expand its operations from just the UK and into mainland Europe in recent years, and now also operates in Germany and The Netherlands.

Retail casualty?

Still, I have major reservations that AO World has what it takes to keep growing at a terrific rate as trading conditions in its home marketplace deteriorate.

Indeed, the retailer — which sources 90% of group revenues from British customers — warned today that “the Board continues to be cautious given the uncertain UK economic outlook, currency impacts on supplier pricing and the possible effect on consumer demand.”

And AO World is right to be conservative as rising consumer jitters, combined with the pressure created by rising inflation, are already taking their toll on wider retail activity. Sellers of big-ticket items like electricals could find themselves taking the brunt of this pain.

The City expects revenues at AO World to rev to around £840m in the year to March 2018, driving the company’s earnings up to 0.6p per share, from losses of 0.9p in the current period. This results in a colossal P/E ratio of 233 times.

However, I reckon the chances of these prospective figures being sharply downgraded are not reflected in AO World’s eye-watering valuations. As such, I think investors should steer well clear of the stock.

Medical marvel

I am pleasantly optimistic about the earnings outlook of medicines developer Dechra Pharmaceuticals (LSE: DPH), however.

The Cheshire developer recently announced that revenues shot 34.7% higher at constant currencies during July-December, to £172.6m. This was up 55.9% at actual exchange rates.

Dechra noted that “a solid revenue performance in our core businesses, good market penetration from recently launched pipeline products and a strong performance from our recent acquisitions” all drove the top line during the period.

And I expect the company’s ambitious M&A drive — a move that is boosting its position in fast-growing animal-care sectors, as well as hot growth regions like Asia — to cause the bottom line to mushroom in the years ahead.

My optimism is shared by the Square Mile, too, and Dechra is expected to punch a 43% earnings rise in the year to June 2017 alone.

A P/E ratio of 27.4 times may be toppy on paper. But a PEG reading of 0.6 suggests that Dechra is actually brilliantly priced relative to its growth prospects. As such, I reckon there is plenty of scope for the share price to keep pounding higher.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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