2 growth stocks I’d buy and hold until 2020 or beyond

G A Chester reveals two growth stocks set to deliver nice returns for investors over the next few years.

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Shares of Carclo (LSE: CAR) are trading 3% higher today at 145p after the global manufacturing group reported “solid first-half trading overall” and said: “The Board anticipates full-year trading will be in line with its expectations and the Group remains on track to grow substantially over the medium term.”

Today’s results give me confidence that this FTSE SmallCap firm, which has a market cap of £106m, is a growth stock I’d be happy to buy and hold until 2020 or beyond. And I feel the same about a £205m-cap stock from the same index, which I’ll come on to shortly.

Down to business

Carclo’s largest division, Technical Plastics (about 60% of group revenues), supplies fine-tolerance, injection-moulded plastic components, mainly for medical products. The division’s first-half operating profit fell 6%. Management said this was due to some key new programmes being delayed into the second half and some operational issues that have now been largely resolved.

The lower profit from Technical Plastics was offset by a 16% increase at its other principal division, LED Technologies. This business, which designs and supplies specialised injection-moulded lighting systems to the luxury and supercar industry, accounts for 35% of group revenue.

The company’s balance sheet remains reasonable after an anticipated rise in net debt to £29.6m from £26m. And there was an encouraging fall in the pension deficit from a previously elevated level.

Nice growth stock on cheap valuation

All three of Carclo’s divisions (the third is a small business in aerospace) are set to have a stronger second half. Forecast earnings per share (EPS) of 12.75p for the full-year to 31 March put the company on a price-to-earnings (P/E) ratio of 11.4. This falls to just 9.5 for fiscal 2019 on the back of a forecast EPS increase to 15.3p, as that substantial medium-term profit growth the company referred to kicks in.

The company has been investing in its manufacturing assets, increasing capacity and efficiency, which should contribute to top-line growth (higher volumes) and bottom-line growth (higher profit margins). Operating in attractive markets and well diversified geographically, with 70% of revenues coming from outside the UK, I see Carclo as a nice growth stock on a cheap valuation.

2020 vision

The other growth stock I’d be happy to buy and hold until 2020 or beyond is the UK’s largest structural steel business, Severfield (LSE: SFR). The company, whose current projects include the new stadium for Tottenham Hotspur FC, has a UK order book of £221m and also an Indian joint venture with an order book of £64m.

The group delivered profit before tax of £13.2m for its financial year ended 31 March 2016 and its target is to double this by 2020. I calculate this would see last year’s EPS of 5.53p rise to over 7p. At a current share price of 67p, the trailing P/E is 12.1. I think it’s eminently reasonable for the market to maintain that multiple, which would mean an average 9% annual rise in the shares through to 2020. On top of that, I’m expecting an average 4% annual dividend yield on cost for investors at today’s price, giving a very decent average 13% total return a year.

Finally, even a small beat on earnings and dividends and a modest re-rating of the shares could bump the return up into the mid-to-high teens. As such, this is another growth stock I’d be happy to buy today.

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.

G A Chester has no position in any of the 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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