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.

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »

Growth Shares

This UK stock could be like buying Nvidia in 2021

Jon Smith thinks he's missed the boat with Nvidia shares, but flags up a UK stock that has some very…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The FTSE 100’s Intertek delivers a bullish update — can the share price soar?

I’d describe Intertek as a quality business with a decent dividend income, but will the share price shoot the lights…

Read more »

Market Movers

Up another 10% yesterday, how high can the Nvidia share price go?

Jon Smith talks through the latest results but flags up why further gains could be harder to come by for…

Read more »

Investing For Beginners

Down 43% in a year, I think this value stock is primed for a comeback

Jon Smith flags up why a FTSE 250 share has fallen so much in the recent past, but explains why…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Nvidia stock is stupidly expensive. Or is it?

Nvidia stock's up over 2,000% in the past five years. Christopher Ruane explains why it could be wildly overvalued --…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

The FTSE 100 stock I’ve been buying this week

Stephen Wright thinks the FTSE 100 slipping back this week has offered an opportunity in one of the highest-quality UK…

Read more »