The FTSE 100 is often associated with huge, mature businesses that pay dividends but deliver very little growth. Today I want to get away from that cliché and look at two terrific growth stocks that have made it into the blue-chip index.
Both of my picks have delivered double-digit share price gains over the last two years — the FTSE 100 has fallen by around 15% over the same period.
Growth stock #1: a pharma play
Hikma Pharmaceuticals (LSE: HIK) has been a top performer so far this year, rising by around 20% in five months. Although pharmaceutical firms have benefited from extra investor interest due to the coronavirus pandemic, I believe Hikma is a genuine growth stock, with solid profits and good prospects.
The group’s business is centred around producing injectable medicines and generic versions of branded products that have lost their patent protection. It’s a very profitable business, with an operating margin of 24% in 2019.
Cash generation is also strong and unlike some larger pharma groups, Hikma doesn’t rely on borrowed cash. Net debt was just $242m at the end of 2019, giving a leverage multiple of just 0.4x EBITDA. In plain English, that’s very low.
Why I’d buy
City forecasts suggest that Hikma’s profits will rise by around 8% this year, with a 10% increase pencilled in for 2021.
The firm’s shares are currently trading close to all-time highs, leaving them with a 2020 forecast price/earnings ratio of around 18. That may not seem cheap, but it’s actually well below the UK pharmaceutical sector average P/E of 30.
Profits are expected to rise by a further 10% in 2021. I see the firm as a growth stock to buy at current levels.
Growth stock #2: my bet on UK property
The UK housing market might not seem like the safest investment at the moment. But I think my next pick is an essential service that estate agents can’t live without — even in a downturn.
Property listing website Rightmove (LSE: RMV) dominates the UK market, leaving rivals Zoopla and OnTheMarket.com trailing in the distance. According to the firm, it had a market share of over 75% in 2019, based on the time spent browsing the top four UK property websites.
This dominance gives Rightmove a lot of pricing power. The company generated an operating profit of £214m on revenue of £289m last year. That’s equivalent to a profit margin of 74%. It’s not hard to see why this has been such a successful growth stock — the Rightmove share price has risen by nearly 40% over the last 18 months.
A long-term winner?
Estate agents tend to complain about Rightmove’s pricing. Some big estate agency groups even clubbed together to launch a rival, OnTheMarket.com.
I have some sympathy with the estate agents’ complaints. But Rightmove is expanding steadily into the letting sector and now also lists new homes. In reality, I believe this website will continue to be an essential part of most estate agents’ businesses.
Rightmove has cut its fees by 75% for the period from April to July this year. 2020 profits will be down. But analysts expect earnings to bounce back next year — a view I share.
The latest forecasts put Rightmove stock on a price/earnings ratio of 30 for 2021. For such a dominant and profitable business, I think this could be a good buy.
