Investing in stocks and shares can be a good way to build up a nest egg for long-term and patient investors. So if I had £3,000 to invest right now, which shares would I buy? With thousands of potential UK-listed choices available to me, I’d clearly need to narrow down my options.
There are many different types of shares. And they can be divided into categories such as growth, value, income, or momentum. If I was investing right now, I’d consider quality growth shares.
Let me explain. I’d describe quality growth shares as those that offer growing earnings, high returns and chunky profit margins. Ideally, these companies should be able to sustain industry-beating returns and profits. As they’re still in a high-growth phase, they’re often (but not always) small or mid-cap shares.
Which stocks and shares?
I reckon Somero Enterprises (LSE:SOM) could be described as a small-cap quality growth share. Somero is a manufacturer of laser guided equipment that’s used to create perfectly level concrete surfaces. This share offers a 30%+ profit margin and steadily growing earnings. With a forecast price-to-earnings ratio of just 12x, I reckon this stock is reasonably priced. It even offers a tasty dividend yield of 5.7%.
One of the reasons why I like Somero is because its equipment is used in high-growth areas like warehouses and data centres. The global rise of e-commerce requires more warehouse space. And more data and technology moving to the cloud requires more data centres too. Both of these need flat, and perfectly level floors. And that’s where Somero comes in.
I have to bear in mind that Somero is a cyclical company. A global recession could have a detrimental effect on its sales, as building projects ease. That said, I’m a long-term investor willing to ride out some short-term volatility, so I reckon this quality growth share is too cheap for me to ignore.
Next there’s Marshall Motor Holdings (LSE:MMH). This is another small-cap that I’d describe as a quality growth share. It’s a UK-based car retailer that sells new and used cars. Car retailers are in a sweet spot right now and are experiencing favourable market conditions. Many in the industry, including Marshall Motor, are reporting robust sales and increased profits. It’s all because of the global shortage in semiconductors. And it’s having a knock-on effect, creating a shortage of new cars coming off the production line. This, in turn is keeping car prices elevated and profit margins at record levels. I reckon these trends are likely to continue for now, so I’d expect earnings to continue growing.
It has a lot going for it. It’s a well-run, high-quality company in my opinion. This small-cap offers a return on capital employed of over 20% and a dividend yield of almost 4%. I reckon it’s cheap too, trading at a forecast price-to-earnings ratio of just 4.3x.
That said, favourable conditions are unlikely to last forever. Earnings and margins could fall back once conditions normalise. Wages are also rising, across several industries. So I’d watch these factors closely. Overall, I like cheap and high-quality stocks and shares that are also growing. I reckon Marshall Motor fits this description nicely and I’d consider adding it to my Stocks and Shares ISA.
Harshil Patel owns shares of Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.