Why I’d still consider buying these top growth stocks

Paul Summers thinks these market minnows could still be great additions to growth-focused portfolios, despite their fairly high valuations.

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With markets resuming their upward trajectory over recent weeks, the challenge of distinguishing those companies that justify their steep valuations from those that are merely benefitting from renewed momentum has returned. Growth-focused investors have a dilemma in front of them.

But today, I’m taking a look at two businesses that I feel can be safely included within the former category and — notwithstanding black swan events — look likely to continue to power ahead in the next year.

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Strong progress

Shares in small-cap fryer management service provider Filta Group (LSE: FLTA) were on fire early this morning after the company released a bullish statement on recent trading to coincide with its annual general meeting. 

The Rugby-based firm stated that it had made “strong progress” since the beginning of 2018. In addition to the sale of 17 mobile filtration units, a total of six new franchises, including one each in new markets of Germany and Canada, had started over the period. 

Elsewhere, Filta’s existing franchises and its own operations were trading in line with expectations with FiltaGMG — the company’s grease management business — making an “increasing contribution” to the market minnow’s overall performance.

Earnings before interest, tax, depreciation and amortisation (EBITDA) were roughly 11% ahead of that achieved by this point in 2017. Once exchange rate fluctuations are taken into account, this works out at growth of 23%.

Unfortunately, Filta’s shares certainly aren’t cheap to acquire, trading as they do at a forecast 27 times earnings.

That said, a PEG ratio of 1.2 before today implies that the price isn’t absurd considering the company’s promise. Indeed, the fact that it boasted of having a “good pipeline of enquiries” from potential franchisees in both Europe and North America certainly bodes well for the rest of the year.

Its line of work may be unappealing but I think that Filta will continue to perform for its owners.

Golden opportunity

Another growth stock I’d consider at the current time would be holiday purveyor On the Beach (LSE: OTB).

Recent interim results were more than satisfactory, in my view, with group revenue rising 19% to £45.3m. Adjusted pre-tax profit came in at £14m — 15% higher than over the same period in 2017.  This was a particularly impressive performance when you consider that the collapse of Monarch airlines led to an increase in seat prices and — for On the Beach — “a corresponding reduction in bookings“.

Despite management’s confidence in being able to meet expectations for the full year, the share price has fallen almost 30% since the numbers were announced. When you consider that the very same shares changed hands for below 200p shortly after the EU referendum, it’s perhaps understandable that some early investors are banking profits. Even so, this seems like a serious overreaction to a fairly rare event.

Right now, a forecast price-to-earnings (P/E) ratio of 22 seems fair considering the progress the company is making in grabbing market share and expanding overseas. The number of daily unique visitors rose almost 24% over the reporting period (to 34.1m) and its decision to branch into Denmark — its third international market — should reap returns over the medium-term. What’s more, a PEG ratio of under 1 suggests all this growth still isn’t fully appreciated by the market.

Having been the victim of nervous sellers over the last few months. I suspect now might be a great opportunity for patient, new investors to begin building a position.

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Paul Summers has no position in any of the shares 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.

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 considered, so you should consider taking independent financial advice.

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