There are two main styles of investment that are commonly discussed: growth and income. The idea is that one type of company is more focussed on growing its business, while the other is often already established and more attractive for its dividend prospects. In reality, the two types of share have a lot of overlap. But if I wanted to invest £20,000 in my Stocks and Shares ISA right now with a focus on growth, here is the approach I would take.
Growth: thinking from the future backwards
I think a good place to start when thinking about growth shares is to look forward to the future. A decade from now, for example, what sorts of businesses will be doing better than now? Will there be consumer needs emerging that mean some of today’s niche businesses could have seen a massive increase in demand?
For example, I expect that the move to digital commerce will continue in the coming years. That could throw up growth opportunities not just for digital retailers like boohoo and Amazon but also for cybersecurity companies. I also think there could be demand for a wider variety of new energy sources.
Proven industries set for growth
But it is not only new industries that can generate substantial growth. In fact, sometimes compelling growth can come from industries that are already well established. For example, a decade ago the likes of Microsoft and Apple were hardly new. But over the past 10 years, those shares have increased by 828% and 697% respectively.
Nor is it just high-tech companies that have continued to grow their value despite already being around for a few decades already. Plant hire specialist Ashtead, for example, saw its shares grow by 1,869% over the last decade.
So, when looking for growth shares to add to my portfolio, I would consider well-established companies with potential growth drivers, not just firms in new or young industries. With £20,000, I would invest equally across six companies I think are well positioned for growth in coming years.
There are a couple of retailers I would consider for my portfolio thanks to their growth potential.
One is JD Sports. Its formula of selling a selection of branded sportswear at keen prices has been a hit with shoppers. In fact, its latest results showed record revenues and profits. But I reckon the best could be yet to come for JD. It has honed its approach over time, meaning it can now expand faster and hopefully more effectively as it pushes into overseas markets such as the US. One risk is local competitors pushing down prices to make it hard for JD to gain market share. That could hurt profit margins. But I think the company’s proven understanding of its market could help it keep growing for years to come.
Another company with a proven retail formula I think has lots of room left for growth is B&M. The high-street discounter saw revenues grow by 26% last year. Post-tax profits were up by 120%. The bigger B&M gets, the greater the economies of scale I think it can achieve. Price-sensitive shoppers may move elsewhere in an economic downturn unless the company keeps prices low. With inflation rising, that could hurt profits. But B&M has shown it knows how to attract customers and keep them coming back. I see that as a recipe for growth.
Digital choices for my Stocks and Shares ISA
I also expect ongoing growth from more digitally focussed companies.
One of them is digital media agency holding group S4 Capital. It is due to report its annual results in the coming week, so I would consider adding more S4 Capital to my portfolio before then. The company expects to double revenues and profits organically over a three-year period. Further growth could come from the acquisitive company buying smaller competitors. Such deals can add costs as well as growth opportunities. The corporate overhead of managing a fast-growing empire could eat into profitability. But after a 13% slide in the S4 Capital share price over the past year, I consider now as a buying opportunity for my portfolio.
I would also consider buying US-based digital commerce giant Amazon for my portfolio. The company has had an incredible run. But I think the best may be yet to come, as the firm capitalises on the network effects of its huge size. Regulatory concerns could lead to the company being forced to limit its growth in the coming decade. But overall I expect it to keep doing what it has already shown it does very well. It is the sort of growth share I would happily buy for my portfolio as part of a buy and hold strategy.
Other growth shares to buy now
I would also consider using some of the £20,000 to add companies to my portfolio that have shown they are able to keep growing even in established markets.
One of those is pork producer Cranswick. Although its industry may sound unexciting, demand for pork continues to increase due to growing affluence in key developing markets. The company is an efficient operator. Its business success means it has increased its dividend annually for over 30 years in a row. One risk is labour cost increases hurting profit margins. But I expect the company to benefit in coming years from ongoing demand growth.
I would also consider lab instrument maker Judges Scientific. Its share price has increased 20% over the past year alone. Thanks to a disciplined approach to buying small manufacturers at an attractive price, it has been able to build a growing footprint. In the scientific instrument market, accuracy matters. That means customers are willing to pay a premium price for the sorts of products that Judges provides. Ongoing lab closures in pandemic-affected markets could hurt revenue and profit growth in the next several years. But with an eye on the long term, I would include Judges among my list of growth shares to buy now for my portfolio.