Every month, we ask our freelance writers to share their top ideas for growth stocks to buy with investors — here’s what they said for May!
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Pets at Home
What it does: Pets at Home is the UK’s leading pet care business. It sells food and accessories, and operates grooming salons and vet practices.
By G A Chester. I believe Pets at Home (LSE: PETS) is on the cusp of a new phase of strong profit growth. Its revenue has been growing annually, consistently increasing its share of the structurally growing pet care market. However, profit growth has been held back the last few years, because it’s been investing heavily in its omnichannel infrastructure.
Management has a medium-term revenue target of at least £2.3bn (versus £1.3bn last year). At the same time, a normalisation of capital investment, and a range of margin-enhancing initiatives, should do wonders for rising profits. For example, a new purpose-built distribution centre, opening this summer, will not only support 10+ years of revenue growth, but also deliver substantial operational efficiencies.
There’s some risk customer belt-tightening could impact the business, but there’s been no sign of it so far, and with much pet care spending being non-discretionary, I’m confident of a positive outlook in the company’s results on 25 May.
G A Chester does not own shares in Pets at Home.
Softcat
What it does: Softcat is a provider of IT solutions that serves both corporate and government organisations in the UK.
By Edward Sheldon, CFA. My top growth stock for May is Softcat (LSE: SCT). Its share price has come down significantly over the last 18 months or so and I think the stock is worth a closer look right now.
I’m bullish on Softcat for several reasons. One is that the company should benefit from the ‘digital transformation’ trend in the years ahead. As it recently said in its H1 results, IT infrastructure spending is becoming “less and less discretionary”. Ultimately, investment in cybersecurity, hybrid cloud environments, and end user devices has become an “operational imperative” for organisations.
Another is that the company’s H1 results were better than expected. One highlight of the results was a 10% dividend increase. This large increase suggests that management is confident about the future.
Finally, I also like the fact that the stock appears to have broken out of its recent downtrend. Lately, the shares have started to trend upwards.
Of course, if tech shares lose their momentum, this stock could underperform.
However, with the company’s price-to-earnings (P/E) ratio currently in the low 20s, I like the risk/reward proposition today.
Edward Sheldon owns shares in Softcat
Whitbread
What it does: Whitbread owns and operates the Premier Inn budget hotel chain in the UK, Ireland and Germany.
By James Beard. The pandemic wreaked havoc on the hotel industry and Whitbread (LSE:WTB) suffered more than most. Its share price fell by 50% as the global economy started to shut down in early 2020. But the company is profitable once more and is growing strongly. It reported a 14.9% increase in like-for-like sales during the third quarter of the current financial year, compared to the same period pre-Covid.
In terms of room numbers, Whitbread has a 11% UK market share, and has plans for an additional 35k rooms. The company has committed £1bn seeking to replicate this success in Germany where it hopes to expand from 8k to 60k rooms. Given its proven track record, I believe revenue and earnings will growth strongly over the next few years.
The opportunity to expand elsewhere could also be on the cards, as the growth stock seeks to achieve its stated ambition of being the world’s best budget hotel chain.
James Beard does not own shares in Whitbread.
