Two growth stocks I’d buy in January

These two growth stocks look as if they have a bright year ahead.

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Topps Tiles (LSE: TPT) might not be the most exciting company in the world, but I’m excited about it from an investment perspective for 2018. 

Since mid-2015, shares in the business have lost around 50% of their value, thanks to sluggish trading, although it now looks as if this cloud overhanging the company is starting to dissipate. 

According to a trading update published by the firm today, covering the 13-week period to 30 December, like-for-like revenues for the first start of the current financial year increased by 3.4%, compared to growth of just 0.3% for the previous year. 

According to Matthew Williams, this growth, which is higher than the rest of the market, “reflects the continued success of our strategy of ‘Out-specialising the Specialists’,” a scheme devised by management to offer completely different tiles in Topps’ stores than the rest of the market. According to management, differentiated products now account for almost 90% of tile sales. 

Opportunities for growth 

As well as offering a unique product set, Topps is also developing a new division targeting the commercial tile market. To complement growth in this division, the group acquired Parkside Ceramics in September. According to today’s update, the “Parkside commercial offer was launched at the 100% Design trade show in October,” and the enlarged company’s first commercial showroom opened in Chelsea in December.

The benefits of this expansion into the commercial market should start to trickle into group results over 2018. If trading figures for the company’s first quarter are anything to go by, then it’s going to be a good overall year for the firm. City analysts are currently expecting revenue growth of 3.3% for the full year but earnings are expected to slide 8% on higher levels of investment. Pre-tax profit is projected to tick higher by a few hundred thousand pounds. 

And considering Topps’ valuation, there’s room for considerable upside in the shares if the group beats expectations. The shares currently trade at a forward P/E of 11.5 and yield 4.5%, so are both cheap and offer a market-beating dividend yield. 

High demand 

Over the past five years, shares in litigation finance provider Burford Capital (LSE: BUR) have returned more than 1,000% excluding dividends. 

The shares have been able to smash the market thanks to the business’s underlying growth. As it turns out, providing litigation finance, and managing funds for those wanting to invest in such instruments is a lucrative business. For 2017, City analysts are expecting the firm to book a pre-tax profit of $164m on revenue on $227m, a pre-tax profit margin of 72%. 

Unfortunately, for 2018 analysts are expecting Burford’s growth to slow but I don’t believe that this will hold back the shares. Earnings per share are expected to slide by 28% from 76p for 2017, to 55p for 2018. 

There is some uncertainty around the predictability of Burford’s earnings, so this figure could be revised higher throughout the year. It’s clear the company is the industry leader in its field, and if first-half 2017 numbers are anything to go by, investors are queuing up to invest in the business. Indeed, during the period, Burford’s new investment management business closed the most substantial investment fund ever raised within the sector, at $500m, to invest in sophisticated strategies. 

Still, despite the company’s bright outlook and leading position, the shares look a bit expensive at a forward P/E 14.8 times forward earning 

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.

Rupert Hargreaves owns no share 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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