Market conditions seem fairly calm as we head into August. But if the economic recovery continues as expected, I think some growth stocks could be poised for further gains.
Legendary growth investor Jim Slater used the PEG ratio — which looks at earnings growth — to find fast-growing companies to invest in. I’ve been using the same technique to find new stocks for my portfolio. Here are my three top picks for August.
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A long-term winner?
Recruitment group Robert Walters (LSE: RWA) specialises in supplying professional staff for sectors such as finance, law, and IT. Profits are bouncing back fast and are already above 2019 levels.
I think one factor that’s helped the group’s recovery is its geographic diversity. More than 70% of fee income comes from outside the UK, with 45% from the Asia Pacific region. This means that, unlike some rivals, Robert Walters isn’t dependent on just one geographic market.
Of course, recruitment is cyclical. Companies are quick to stop hiring when the economy slows. That’s always a risk. But Robert Walters had more than £120m of net cash at the end of June, providing a healthy safety net.
Robert Walters’ PEG ratio for the next 12 months is just 0.5. That reflects strong earnings growth forecasts. I think this growth stock has further to go.
Profiting from the logistics boom
US firm Somero Enterprises (LSE: SOM) designs and sells machinery to produce perfectly flat concrete floors. The company is a market leader in this sector, especially in the US.
Demand is very strong as modern warehouses need flat floors for high racking systems and robotic picking. Growth in internet retail has made this even more important.
The big risk here is that demand will slump in a recession — Somero suffered badly in 2008/9. A slowdown seems likely to me at some point, but I don’t see any cause for concern just yet. In July, Somero said trading in its core US market was ahead of expectations so far this year.
Somero’s pre-tax profit has risen from £1.2m in 2012 to £24.6m in 2020. There’s plenty of cash on the balance sheet and the company has a record of paying generous dividends.
I think this well-run business could have further to go. It’s a share I’d be happy to buy.
A below-the-radar growth stock
Lender S&U (LSE: SUS) provides financing for used car buyers and property loans. The founding Coombs family still own a majority of the company’s shares and the business is overseen by chairman Anthony Coombs.
Most of S&U’s profits come from its car finance business, which targets customers with imperfect credit ratings. Historically, this has been very profitable, with an operating margin of more than 40%.
Admittedly, lenders like S&U sometimes suffer from a surge of bad debt during recessions. This is a risk here, in my view, especially as the company targets borrowers who can’t get mainstream loans.
However, this family-run business has been operating successfully since 1938. Broker forecasts suggest that the group’s earnings will by around 35% in both 2021 and 2022. With a PEG ratio of just 0.5 and a tempting 3.6% dividend yield, I would be happy to buy S&U today.
