2 inflation-beating growth stocks for a starter portfolio

Roland Head looks at two profitable growth stocks he’d consider for a new stock portfolio.

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Stock ideas for starter portfolios often revolve around safe FTSE 100 dividend stocks. I agree that these are a good foundation for a new portfolio, but I also think it’s worth including some growth stocks.

These can provide an opportunity for faster capital gains and allow you to learn what investing style suits you best.

However, to protect your portfolio from big losses, I think it’s essential to focus on profitable firms with proven business models. Today I’m looking at two potential buys.

Disrupting an old business

The business of foreign exchange isn’t new. But the recent years have seen a number of new technology companies get involved, with a focus on providing better value for customers.

One example is FairFX Group (LSE: FFX), which operates a peer-to-peer platform that allows customers to make transactions in different currencies. The group also offers pre-paid cards and is building an online bank.

This £155m AIM-listed firm has taken a few years to reach a profitable scale. But 2017 saw the group generate its first annual profit. According to figures released today, revenue rose by 52% to £15.5m last year, generating an adjusted pre-tax profit of £0.9m.

The value of transactions handled by the company rose by 41% to £1.1bn last year. Customer numbers rose by 11% to 728,985. In my view these figures highlight the size of the opportunity for the firm — it’s still a relatively small player in a very big market.

The way forward

FairFX is expanding through a mixture of acquisitions and organic growth. Last year’s deals included digital banking group CardOne and Q Money. The company also recently gained full membership of MasterCard, so can now issue its own cards.

Although foreign exchange transactions still generate most of the group’s revenue, I think the banking operation could have big potential.

Today’s trading update confirmed that growth stayed strong the first quarter. Like-for-like revenue rose by 18.7% and total revenue, including acquisitions, rose by 85.3% to £4.8m.

The shares currently trade on a 2018 forecast P/E of 20. This doesn’t seem excessive to me given the current rate of growth. I’d be willing to buy a starter position in FairFX after today’s news.

Compare this

Foreign exchange isn’t the only part of the financial sector that’s faced disruption from tech firms. Price comparison businesses have forced financial firms to be more competitive and transparent in their pricing.

One of the top players in this sector is Gocompare.com Group (LSE: GOCO). This £470m business generated an operating profit of £33m on £149.2m of revenue last year. That’s equivalent to an impressive operating margin of 22%.

Although Gocompare.com isn’t the biggest company in this sector, it’s still fairly large. Last year’s results show us that the firm handled 32.2m customer “interactions” in 2017. Average revenue per interaction was £4.67.

Still growing fast

Price comparison isn’t new anymore. But the firm is making targeted acquisitions and upgrading its services to provide an increasingly personalised service.

City analysts expect adjusted earnings to rise by 24% to 8.1p per share this year. The group’s dividend is expected to rise by 45% to 2.03p per share.

These figures put the stock on a 2018 forecast price/earnings ratio of 14 with a prospective yield of 1.8%. In my view, this could be a good stock to tuck away for long-term income and growth.

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 owns shares of and has recommended Mastercard. 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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