These 2 monster growth stocks could continue to crush the FTSE 250

If you want to outperform the FTSE 250 Index (INDEXFTSE: MCX), these stocks have the right qualities.

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Over the past 12 months, shares in Homeserve (LSE: HSV) have smashed the wider FTSE 250. 

Since the end of May last year, the stock has returned 38%, compared to the FTSE 250’s gain of 13%, excluding dividends, over the same period.

Over the past two years, Homeserve’s performance is even more impressive. The stock has returned 68%, more than tripling the return of the FTSE 250. And I believe that this performance can continue as the home services group continues to build on its existing customer offering.

Global expansion

Today Homeserve reported its results for the year ended 31 March, which show that the group’s efforts to diversify outside the UK are more than paying off. 

For the period under review, statutory operating profit increased 29%, and basic earnings per share jumped 26% year-on-year overall. Adjusted operating profit in North America rose 146% as the number of customers increased by 20% to 3.6m. Meanwhile, France and Spain both delivered double-digit growth in adjusted operating profit, up 13% and 20% respectively.

What is exciting about this business is that customers clearly appreciate its offering, which management continues to expand. Homeserve expanded into three new business lines during the last fiscal period: Home Experts; plus HVAC (Heating, Ventilation and Air Conditioning); and Smart Home. The number of customers worldwide increased 7% to 8.4m with a retention rate of 82%. With profits growing nearly three times faster than customer numbers, it looks as if the group is active in cross-selling new offerings.

As my Foolish colleague, Royston Wild recently pointed out, the one downside of this company is its valuation. Specifically, the stock currently trades at a forward P/E ratio of just under 24. However, with customers flocking to the group’s offering, and management’s record of completing bolt-on acquisitions to help boost growth successfully, I believe the shares can continue to beat the FTSE 250.

Dividend growth 

Another mid-cap I’m optimistic on the outlook for is M&C Saatchi (LSE: SAA). This marketing group might not be a big household name, but investors should consider it for their portfolio.

M&C Saatchi is investing for the future, building offices around the world to improve exposure to new clients. Unfortunately, while the spending should pay off in the long run, it has impacted short-term profitability. Still, looking past these temporary headwinds, I think the future is bright for the firm.

Earnings per share are expected to rebound by 260% in 2018 to 25p as one-off expansion costs fall away, and analysts have pencilled in growth of 9% for 2019. 

The City is also expecting the company to maintain its record of dividend growth. Over the past six years, the annual dividend distribution to investors has more than doubled, and an increase of 10% per annum is expected for the next two years.

The current yield of 2.6% might not be the highest around, but it’s covered 2.5 times by earnings per share and is backed up by £7.5m of cash on the balance sheet. In my view, if you’re looking for income, this is undoubtedly one stock to consider.

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 recommended Homeserve. 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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