When market conditions get stormy, it can be tempting to sell your stocks and switch your savings into cash. After all, if you put your money in a cash ISA, it will be safe — right?
The problem with this approach is that you’ll probably struggle to earn enough interest to keep ahead of inflation. This means that as the years pass, the purchasing power of your savings may fall.
Although I’d always aim to keep several months’ living costs saved in cash, I believe stock market investing is one of the best ways to increase the real value of your savings over time.
Here’s one I’d buy today
The first company I want to look at today is a tech stock that’s risen by 300% over the last five years.
Dotdigital Group (LSE: DOTD) is a premium email marketing platform which integrates with many popular website shopping systems. It’s evolving through the use of new technology, such as artificial intelligence, and plays an increasingly active part in its customers’ marketing efforts.
Growth remains strong. According to figures released today, sales rose by 35% to £43.1m last year. Adjusted operating profit grew 22% to £10m.
Customer numbers also rose by 26% to 689, while the firm’s average revenue per user rose 18% to £845 per month. Both numbers seem fairly impressive to me, and should support future growth.
Not too late to buy
You might think that it’s too late to buy this high-tech success story. I’m not so sure. Broker forecasts suggest that earnings should rise by another 20% this year, putting the stock on a 2018/19 forecast price/earnings ratio of 23.
Given the group’s strong cash generation, and high return on capital employed of 26%, I think this business could continue to generate growth for its shareholders. It’s not cheap, but I remain bullish about this stock.
Motoring ahead
A larger company I like from the high-tech marketing sector is car listing website Auto Trader Group (LSE: AUTO).
The group’s used car listings are all online these days and it’s become a very profitable enterprise.
Although the core used car business might have limited growth potential, Auto Trader is also expanding into the wholesale (auction) and new car listing markets, via contracts with big dealership groups.
Like property rival Rightmove, Auto Trader benefits from a network effect — dealers have to list their stock on the website because that’s where everyone looks. This gives the firm strong pricing power.
Figures for the year to 31 March showed profit margins continuing to rise. Revenue rose by 7% to £330m, but average revenue per retailer forecourt climbed 9.6% to £1,695. Pre-tax profit was 10% higher, at £210.8m.
The group’s operating profit margin last year was a staggering 66%. Such a high level of profitability means that the business generates a lot of spare cash.
A cash machine
My sums show that free cash flow available to shareholders, after debt repayments last year, was £145.2m. All of this was returned to shareholders, through £96.2m of share buybacks and a £52.2m dividend payout.
I’m confident the business can retain its leading share of the car listings market. And regular share buybacks should mean that earnings per share keep rising, even if profit growth slows.
Auto Trader currently trades on 21 times 2018/19 forecast earnings, after recent falls. That seems fair to me. I’d keep buying.
