2 high-growth stocks you may regret not buying

Explosive growth means that you should consider these two stocks for your portfolio.

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Over the past year, shares in XLM Media (LSE: XLM) have powered ahead as the company has smashed expectations. 

Indeed, at the end of November, in a post-first-half trading update, the marketing services firm announced to investors that adjusted earnings before interest, tax, depreciation and amortisation for the full year will be “materially ahead” of current expectations following a few strong months

Organic growth has been complemented with acquisitions, and today the firm announced yet another deal as part of its long-term growth plan. Specifically, the company has acquired some leading Finnish gambling-related informational websites from Good Game Ltd for a total cash consideration of up to €15m. These sites reportedly “provide visitors with useful information such as reviews of online casino websites, comparison of promotions offered by different brands and information on payment solutions.” And it seems to have paid a fair price of around nine times EBITDA. XLM itself is trading at a multiple of over 10 times EBITDA. Management expects the deal to be immediately earnings enhancing. 

From strength to strength 

This deal should lead to yet more earnings upgrades for it. Over the past few months, City analysts have consistently upgraded their outlooks for the company as it has gone from strength to strength. Right now, analysts are expecting the firm to report earnings of 11.3p per share for 2017, up from just 10p at the beginning of the year. If XLM hits this projection, then the group will have grown pre-tax profit threefold in five years. And analysts believe that this can continue with growth of 10% or more per annum pencilled in for the next three years. 

Based on XLM’s historical performance, I believe these figures will turn out to be conservative, and shareholders could be in for a much faster expansion in the years ahead. With this being the case, I believe that the group’s valuation of 17.8 times forward earnings seems appropriate. There’s also a yield of 3% on offer for investors. 

Beating expectations

As well as XLM, I believe that you might regret not buying furniture retailer SCS (LSE: SCS) as the firm goes from strength to strength. Over the past five years, it has nearly quadrupled net profit as revenue has risen by a third. 

Even though there have been some concerns about the group’s ability to maintain its growth rate as inflation rises and the UK consumer pulls back on spending, so far this slowdown has not materialised. 

In a trading statement published at the end of November, ahead of the group’s AGM, management reported that SCS had made an excellent start to the financial year, with “like-for-like order intake up 2.9% for the 16 weeks ended 18 November 2017, and two-year like-for-like orders up 8%.” City analysts are expecting little to no earnings growth for the company for the year, but in my view, this looks conservative based on SCS’s revenue growth. 

What’s more, as well as strong revenue growth, its shares are cheap. Current projections have the shares trading at a forward P/E of 9.5 and supporting a dividend yield of 6.8%. The payout is covered 1.5 times by earnings per share, so for the time being, it looks pretty secure. The firm has more than £40m of net cash on the balance sheet as well

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 does not own any 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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