Growth stocks did better than a lot of people expected in 2023. Rolls-Royce pulled the FTSE 100 higher and Nvidia helped the S&P 500 to a spectacular result.
The value of companies that can increase their earnings shouldn’t be underestimated. So here are two stocks that I think can generate market-beating returns in 2024.
Diploma
Diploma (LSE:DPLM) shares trade at a price-to-earnings (P/E) ratio of 39. Any stock priced at that level comes with big expectations – and that’s a risk for investors looking to buy it.
The trouble is, the stock has traded at a high P/E ratio for years. And while it has been coming up with the growth to justify this for some time, things have really taken off recently.
After a change of CEO in 2019, revenue has gone from £545m to £1.2bn in 2023. That’s despite a dip in 2020 due to the pandemic.
Diploma’s business model involves acquiring distributors of industrial components and then helping them run their operations more efficiently. This means growth comes in two forms.
The first is the acquisition of the businesses and the second is the improvements the company can make to their profitability. Both of these have been firing well for the company.
I don’t see Diploma’s growth opportunities running out any time soon. That’s why I view it as a top stock to buy for 2024.
Berkshire Hathaway
Berkshire Hathaway (NYSE:BRK.B) is similar to Diploma in a number of ways. It aims to grow through a combination of acquisitions and operational efficiency.
It might seem odd to characterise a company led by one of the world’s greatest ever value investors as a growth stock. But Warren Buffett maintains that the goal is higher earnings.
One reason I’m backing Berkshire to outperform this year is the company’s balance sheet. Right now, the market is more optimistic than I am about 2024 in terms of the economy.
I think the chances of interest rate cuts and avoiding a recession are lower than most. That means I’m looking at shares in businesses that can do well in a surprise downturn.
Berkshire is known for having a huge cash pile available. And this should mean two things.
First and foremost it ought to insulate the firm against any kind of financial shocks. Second, it allows the company to seize opportunities that present themselves.
Without Charlie Munger, the company depends heavily on Buffett. While that’s a risk for investors, relying on the ‘Oracle of Omaha’ is a policy that has worked well before.
Growth stocks in 2024
I think 2023 demonstrated that betting against growth stocks is rarely a good idea. And both Diploma and Berkshire look like highly impressive companies to me.
Neither stock benefitted from any kind of AI hype last year. Just solid, quality earnings growth that I expect to continue for some time to come.
