Today I’m looking at two growth stocks I believe have the potential to deliver big gains for investors. Both are well-established companies, despite being relatively new arrivals on the London market. So which stock, if any, should you be buying today?
Rising profits
You won’t learn much about CYBG (LSE: CYBG) from its name. But this group is actually the holding company which owns the Clydesdale and Yorkshire Banks. It joined the market in February 2016, since when the shares have risen by 40%, outperforming the 24% gain delivered by the FTSE 250.
CYBG shares rose by 8% this morning after the group issued a strong third-quarter trading update. The group’s mortgage lending rose by 5.8% on an annualised basis during the quarter, while lending to small businesses rose 4.7% on the same basis.
Profit margins are holding firm, despite the growth in lending. Net interest margin – a key measure of lending profit – rose slightly to 2.29% during the quarter, while underlying operating costs are now expected to be £680m this year, below previous guidance of £690m-£700m.
Still good value?
CYBG’s current share price of 285p is in line with its last-reported tangible net asset value of 283.3p per share. This means that the bank’s valuation reflects no more than the theoretical break-up value of its assets.
A profitable and stable bank would normally trade at a premium to its tangible book value. I believe this is likely to happen at CYBG as the group’s profitability continues to improve.
Analysts expect underlying earnings to rise by 16% to 18.9p this year, putting the stock on a forecast P/E of 14. A maiden dividend of 3p per share is also expected, giving a 1.1% yield. I believe these shares could be a rewarding buy at current levels.
A top tech buy?
When I last wrote about price comparison business Gocompare.Com Group (LSE: GOCO), I suggested the group might be on the lookout for acquisitions to help fuel growth. Today’s interim results confirm this, reporting a “first strategic investment” in Mortgage Gym, a new mortgage-matching start-up due to launch later this year.
I view Gocompare.com as being similar to Zoopla. It’s not the market leader (Moneysupermarket.com) but it can still make a lot of money by sweeping up the remainder of the market.
Today’s interim results from Gocompare suggest to me that this view may be correct. The group’s marketing margin – a measure of adjusted operating margin – rose from 34.5% last year to 39.6% during the first half of 2017. That’s better than Moneysupermarket, whose equivalent measure fell from 34.1% to 33.4% during the first half of the year.
Average revenue per interaction rose by 2.8% to £4.43, while adjusted earnings per share rose by 14.3% to 3.2p. That’s also better than Moneysupermarket, whose adjusted earnings per share only rose by 4% during the same period.
Gocompare.com currently trades on a 2017 forecast P/E of 18, falling to a P/E of 15 for 2018. In my view, this stock still has attractive growth potential. I believe shareholders should hold on for more.
