Why I’d buy these promising growth stocks

Do these growth shares have the potential to beat the market?

| 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.

Today, I’m taking a look at two growth stocks I believe have the potential to beat the market.

Favourable tailwinds

First up is Ashtead Group (LSE: AHT). The international equipment rental company is benefiting from favourable tailwinds as a weak pound and improving US construction activity underpin expectations of continued earnings growth.

As the US market accounts for more than 80% of the group’s revenues, Ashtead has much to gain from the country’s improving economic outlook. And in addition to cyclical tailwinds, the group’s growth prospects are also bolstered by structural factors, such as the chronic underinvestment in critical infrastructure over past decades, which has created an urgent need to repair, renovate and replace its roads, bridges, and other infrastructure projects.

As expected, given the nature of the business, its rental operations are extremely cash generative and this has meant its dividend has been covered comfortably by free cash flow. And although the stock has a prospective yield of just 1.9% for the current year, I reckon there’s plenty of scope for dividend growth given that the forecast payout ratio is just over 25%.

Two reasons

There are two reasons for why I prefer Ashtead to others in the sector. First, the company has a great earnings track record, which demonstrates the robustness and resilience of its business model.

Over the past five years, underlying earnings per share grew by a compound annual growth rate (CAGR) of 44.6%. And looking ahead, City analysts expect the group to continue to grow earnings in double-digit percentage terms, albeit somewhat more modestly, with forecasts of underlying EPS growth of 15% this year, and 11% in 2018.

Second, the company’s size gives it a significant competitive advantage. Its larger scale allows it to spread overhead costs more broadly and helps it to negotiate better prices with suppliers. This has enabled it to deliver EBITDA margins of almost 50% and produce returns on investment ahead of its peers.

With a forward P/E of 13.4, the stock may not be as cheap as some in the sector. However, it’s valuation doesn’t seem too demanding given that the average FTSE 100 company trades at 14.6 times their expected earnings this year.

Growing order book

Also offering upbeat growth potential is Morgan Sindall (LSE: MGNS). Business at the construction and infrastructure group is booming as growth from regeneration projects drives its order backlog higher. At the end of last year, its order book rose 29% to £3.6bn, while adjusted operating profits increased 26% to £48.8m.

The group has been making good progress on its development portfolio to regenerate town centres and has a strong visible pipeline of future regeneration opportunities. Morgan Sindall is also targeting improved operational performance as it continues with its cost reduction focus, particularly for its new contracts.

The stock looks affordable to me. City analysts forecast adjusted earnings of 97.4p per share this year, putting the stock on a forward P/E of 12.7. What’s more, investors could look forward to an expected 14% dividend hike this year, which would push the payout up to 40p a share and give it a prospective yield of 3.2%.

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.

Jack Tang has a position Ashtead Group plc. 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.

More on Investing Articles

Investing Articles

These were the FTSE 100’s dogs and stars in February

The FTSE 100 limped along last month, but some Footsie shares soared while others slumped. Here are February's winners and…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

This £43bn of passive income is up for grabs today!

As a lover of passive income, I'm always on the lookout for extra cash. The good news is that these…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Is this my once-in-a-decade chance to buy these 2 beaten-down UK shares before they rocket?

The FTSE 100 has had a bumpy ride but these two UK shares have had it bumpier. Could now be…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

£6k bought me 3,093 shares in this overlooked FTSE passive income stock yielding 9.1% a year

This FTSE 100 dividend stock pays one of the most generous levels of passive income on the index, yet often…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

With a 5.35% yield does it matter if the National Grid share price never rises again?

The National Grid share price will never fly to the stars, but given the regular supply of dividends it offers,…

Read more »

Risk reward ratio / risk management concept
Investing Articles

Here’s why I think the Lloyds share price is undervalued but still not worth me buying

Oliver Rodzianko reckons the Lloyds share price is not appealing enough for him to make a long-term value investment in…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Insiders are buying Rolls-Royce shares! Should I do the same

Two directors have been buying Rolls-Royce shares since the start of the year. Does that mean the rally has further…

Read more »

Senior woman potting plant in garden at home
Investing Articles

How I’d invest a £100K SIPP to target £8K in dividends annually

Christopher Ruane sets out some principles he adopts when investing his SIPP and explains how he would aim for a…

Read more »