Investing in growth stocks takes patience. But for those who are prepared to wait, they can be a great way of building wealth over time.
The key is finding companies that are going to be able to grow their earnings consistently for a long time. And there are a couple that I think look like good candidates right now.
Growth prospects
Acquiring other businesses can be a great source of growth. This can be risky if it’s done badly, but it can be a great way of boosting earnings for a skilled management team.
A great example is Berkshire Hathaway. Warren Buffett’s skill in making acquisitions has turned a struggling textile mill into a hugely successful conglomerate with a diversified set of operations.
As Buffett notes, Berkshire’s size now makes rapid growth a challenge. The acquisition opportunities big enough to make a difference to a $885bn business are limited.
Berkshire isn’t the only company with the ability to acquire well, though. There are other firms with a similar structure that don’t have the same obstacles of size.
Bunzl
FTSE 100 stock Bunzl (LSE:BNZL) is a great example of this type of operation. The company is a collection of around 150 subsidiaries that distribute hygiene, packaging, and safety products.
A combination of acquisitions and organic growth have seen earnings per share increase by an average of around 10% per year over the last decade. And there could well be more to come.
Management has indicated that the pipeline for acquisitions looks robust. And with a £10bn market cap, it should be a long time until the company’s size becomes any kind of obstacle to its growth.
The stock trades at a price-to-earnings (P/E) ratio of 19, which is higher than the FTSE 100 average of 13. That’s a risk for investors to consider, but the company has some unusually good attributes.
Bunzl combines the speed and reliability of a global firm with the agility and responsiveness of a local business. This is a powerful combination that I expect to bring strong growth for a long time to come.
Dover
Dover Corporation (NYSE:DOV) is another interesting growth stock – if I’d bought it five years ago, I’d have doubled my money by now. I think that makes it worth paying attention to.
The firm is a collection of around 50 businesses focused on industrial equipment, components, and support services. Its subsidiaries dominate their respective industries, making them hard to disrupt.
Dover is over twice Bunzl’s size, which increases the risk of the company’s growth slowing. And earnings per share have only increased by around 6% per year over the last 10 years.
It’s worth noting, though, that the stock trades at a lower P/E ratio of 17. And the company’s status as a Dividend Aristocrat speaks to its durability as a growing business.
Building wealth
At today’s prices, neither Bunzl nor Dover looks like an obvious bargain. But the point of growth stocks isn’t what the company makes right now, it’s what it is going to make in the future.
In my view, both Bunzl and Dover are incredibly robust businesses with the opportunity to grow their earnings significantly over time. And when they do, I think today’s prices will look like terrific value.
