With the UK stock market depressed, it’s a good time to look for beaten-down growth stocks.
And for me, the most-prized element to search for is a robust record of steady growth in earnings from year to year.
Let’s face it, most businesses have been stress-tested by macroeconomic and geopolitical events for months now. But some have delivered consistent earnings growth despite all the challenges.
However, most share prices have been weakened by the volatile market conditions. Nevertheless, there may be a general bull market for stocks and shares coming soon.
Right now, we could be in a purple patch where valuations of quality growth businesses are attractive for investors aiming for a long-term hold.
Growth is a component of value
Famous billionaire investor Warren Buffett once wrote that growth is a component in the calculation of value. And it’s a variable that can range in importance “from negligible to enormous”. However, the impact can be negative as well as positive.
Perhaps his investment in Apple is a good example of the power of growth in a portfolio. At one point, the position had delivered him a return worth five times his initial capital.
But with any growth-leaning stock, it’s always worth heeding Buffett’s warning about the potential negative effects. If a business goes ex-growth or into earnings decline, the falls in the stock price can be large.
I’ve run some screens to try to find attractive shares with resilient and consistent growth in earnings over the past few years. And two stand out as looking attractive right now. They could be worth an investor’s further and deeper research time.
The first is IMI, the specialist engineering company that develops and makes products and solutions for the fluid and motion control markets.
The record of normalised earnings is impressive with increases every year since at least 2017, including through the pandemic. City analysts expect further high single-digit percentage increases for 2023 and 2024 too.
Targeting accelerated growth
The share price is showing some weakness. And one risk for investors is the business will likely be vulnerable any future severe downturn in general economic activity.
However, in July’s half-year results report, the directors were upbeat. Chief executive Roy Twite said recent restructuring further aligned the business to key sectors and positioned the company to “accelerate growth”.
Secondly, Telecom Plus also looks attractive. The company resells utility services, including gas, electricity, fixed line telephony, mobile telephony, broadband and insurance services under the Utility Warehouse and TML brands
Normalised earnings show meaningful advances since the trading year to March 2018. However, there was a single-digit percentage dip in the pandemic year. And that’s understandable because lockdowns affected the activity of the firm’s self-employed agents.
One risk for shareholders is that the sales model could become broken if people decide they no longer wish to be agents for the company. Or energy suppliers may decide to cut out Telecom Plus and market directly to customers, or via some other method.
But analysts expect further increases in earnings for this year and next. And in August, the company’s outlook statement was robust.
Positive investment outcomes are never certain in the stock market. But these two businesses look well placed to continue growing in the coming years.
