One growth stock I’d avoid like the plague right now and one I’d buy in a shot

Every investor dreams of buying a growth stock just before it roars into life, but this one’s too risky for me. However, there’s one I would buy.

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I’ve mostly been buying dirt cheap FTSE 100 shares lately, but now it’s time to inject some excitement into my portfolio with a growth stock or two. While I love seeing my dividends roll up over the years, I’d also like to enjoy some capital growth.

A few weeks ago, there was a flurry of excitement around fast fashion group boohoo (LSE: BOO). After a nightmare couple of years, the AIM-traded stock suddenly jumped 18% in a week, as it emerged that Frasers Group owner Mike Ashley was building a position.

What’s Ashley up to?

Ashley has made a habit of snapping up struggling rivals and adding to them to his conglomerate. He’s doing the same with boohoo’s rival ASOS too. Frasers already owns House of Fraser, Sports Direct and Flannels, and it clearly isn’t finished yet.

Private investors who decided Ashley’s purchase was a trigger signal to buy boohoo will have been disappointed so far. The initial excitement has faded and it’s down 5.61% over the last week. Investors keep losing money on this stock. The share price is down 24.26% over one year and 88.05% over two years.

boohoo still generated revenue of £1.77bn last year, although it fell 11%. It made a profit too, of £895.2m, albeit down 14%. It ended the year with net cash of £5.9m, when markets had forecast £55m net debt.

It’s a leaner, lighter operation, and now there’s a fresh source of demand for its shares. I’m almost talking myself into buying it here, but I need to keep a level head. We don’t know Ashley’s intentions. He’s also buying shares of Currys and electrical goods specialist AO World. Plus he holds shares in high street fashion giant Next. His strategy is all over the shop.

Frasers now owns 10.4% of boohoo. He owns 19.3% of ASOS, but that hasn’t stopped its share price from falling 38% over the last 12 months. I know too many investors who’ve lost too much money on boohoo. I’m steering clear.

I’ll drink to this stock

I don’t have the same qualms about FTSE 100 spirits giant Diageo (LSE: DGE), even though its share price has also done badly, falling 16.87% over the last year.

Diageo has also been tipped to recover, but with the share price down 4.46% in the last month, investors are having to be patient here too. Yet it’s clearly a much less risky proposition than boohoo. It’s a huge £70bn company whose product are sold in more than 180 countries and not just over the internet.

Diageo can be cyclical and recent slippage looks like the perfect time for me to buy. Today’s valuation of 19.2 times earnings is relatively low by its standards, although naturally, I wish it was a bit lower.

A long-term threat is that young people in the West are drinking less alcohol (even if a Friday night on my local high street suggests otherwise). If that trend continues, Diageo could struggle. However, we’re a long way from that point. I still think it’s a great ‘buy-and forget’ stock. By contrast, if I held boohoo, I wouldn’t forget about it. I’d be watching it like a hawk and frankly I don’t need the stress.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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