The Motley Fool

1 growth stock I’d buy in 2018 and 1 I’d sell

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.

The share price of embattled online white goods retailer AO World (LSE: AO) is up over 10% today as the company announced a 16.6% year-on-year rise in sales for the quarter to December. However, even after this solid performance, AO World is still one growth share I’d steer clear of in 2018.

My primary reason is that its business model of selling white goods online, while offering the possibility of improved margins compared to bricks and mortar competitors, puts it in a highly competitive sector that is utterly reliant on solid economic growth.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

In addition to this, AO’s stock is currently valued like an up-and-coming tech one, not a boring old electronics retailer. The company’s current market cap is £600m against half-year operating losses of £12m that are increasing as the firm expands into Europe and ramps up marketing expenditure in the UK.

And although UK operations are now marginally profitable after years of operation, they only produced £2.5m in operating profits for the half year to September on some £316.8m in revenue. Indeed, these operating profits were a full 73% lower than the year before due to the aforementioned investments in increasing brand awareness. Add in the losses from expanding European operations and I see little prospect for sustained profits in the near term.

With low margins, high competition and an astronomical valuation, I see plenty of better places to invest my cash than a highly cyclical retailer such as AO World.

Serving up a heaping plate of profits

I’m much more interested in FTSE 100 catering giant Compass Group (LSE: CPG). As corporations the world over look to trim operating costs and focus solely on their core competencies, Compass is a major winner as it offers customers such as schools, hospitals and corporate HQs the opportunity to outsource the costly business of running cafeterias.

In the year to September this trend continued apace as Compass notched up organic revenue growth of 4% to £22.9bn, driven by further inroads into the highly profitable North American market. A laser-like focus on operational efficiencies meant operating profits grew by an even greater 5.6% to £1.7bn during the year.

Management sees further scope to improve these metrics, particularly as margins in the US are significantly higher than those elsewhere and a rebound in oil prices should lead to a rebound in demand for its services in oil camps the world over.

Another reason I like Compass is that the group’s sales are largely defensive as its customers will by and large require food offerings throughout the economic cycle. This allowed management to return gobs of cash to shareholders last year through a regular dividend of 33.5p and a special payout of 61p that together yielded a whopping 6.1%.

Of course, FTSE 100-beating dividends, non-cyclical growth, rising margins and a long history of market-outperformance mean Compass shares trade at a premium valuation of 20 times forward earnings, but I believe this is a fair price to pay for these characteristics and solid growth prospects over the long term.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.