2 growth stocks I’d buy and hold for 2018

Roland Head takes a look at two promising growth stocks from his watch list.

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Shares in FTSE 250 pharmaceutical group Indivior (LSE: INDV) have risen by 177% since the firm was spun out of consumer goods firm Reckitt Benckiser at the end of 2014.

However, it hasn’t been a smooth ride for investors in this opioid addiction treatment specialist. The shifting tides of the firm’s legal battles against generic competitors have caused whiplash movements in the share price. A strong nerve has been required to continue holding.

Growing pains could ease

As I’ve commented before, one way forward is for the company to use its strong cash reserves and borrowing facilities to make acquisitions that will broaden its portfolio. News released today suggests that management may be taking steps in this direction.

Indivior has announced details of a collaboration with a small Swiss company called Addex Pharma, which is developing innovative treatments for alcohol and cocaine addiction. The UK firm will initially invest just $5m, but the potential scale of this deal seems quite large.

In today’s update, Indivior says that potential milestone payments to Addex “could total $330m over time if all development, regulatory and sales goals are achieved”. Given that Indivior’s annual revenue is currently around $1.1bn, it seems to me that the Addex collaboration could be significant if it’s successful.

Hold on for more

The group ended the third quarter with net cash of $322m. Management also recently refinanced lending facilities of $484m at significantly lower interest rates.

This combination should give Indivior plenty of financial firepower to defend its market share and fund joint ventures or acquisitions. With the shares trading on a 2018 forecast P/E of 16, I’d continue to hold.

An impressive performance

Pre-tax profit rose by 11% to £111m last year for the Lancashire-based polymer solutions group Victrex (LSE: VCT).

Strong cash generation lifted net cash to £120m, and prompted management to announce a special dividend of 68p per share. This more than doubled last year’s ordinary dividend of 53.8p per share.

Growth could remain strong

Victrex shares have risen by 36% over the last year. I believe further gains are likely in 2018.

Earnings forecasts for the current year were boosted in September, when the company said that changes to patent legislation would cut its effective tax rate from 21% to 12%.

Analysts have also upgraded their forecasts for 2018 since Victrex’s results were published last month. Such upgrades often take place in several stages, so I wouldn’t be surprised if further increases follow should February’s scheduled trading statement be positive.

One of the key attractions of this business is its high returns. The group’s operating margin was 38% last year, supporting a return on capital employed of 22%. Such high figures mean that Victrex can generate cash to invest in growth and pay dividends without needing to use debt. For shareholders this can be a potent formula for long-term gains.

Although the stock’s forecast P/E of 20 isn’t cheap, adjusted earnings are expected to rise by 11% this year. I believe the firm could beat this figure. It’s also worth noting that the group’s ordinary dividend is expected to grow 30% to 70p, giving a worthwhile yield of 2.7%. In my view, the shares remain worth buying and holding in 2018.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Victrex. 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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