2 UK growth stocks I’d buy ahead of the Magnificent Seven

It’s not just the US that has growth stocks with terrific prospects. The UK also has some quality businesses that can increase their earnings over time.

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Over the last five years, returns from the so-called Magnificent Seven have been – well – magnificent. But I’m looking elsewhere for opportunities to buy growth stocks at the moment.

With the possible exception of Alphabet, shares in the big US tech companies look fully valued to me. In the UK, however, I think there are some attractive opportunities.

Great businesses

I think Microsoft is arguably the most impressive company in the Magnificent Seven. But FTSE 250 firm Games Workshop (LSE:GAW) compares favourably in several ways.

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Over the last 10 years, Microsoft has grown its earnings per share (EPS) at 23% per year. There’s no question that’s extremely impressive, but Games Workshop has managed 28% EPS growth. 

More importantly, Microsoft has achieved this growth by reinvesting around 66% of its net income. Games Workshop, however, has only retained 28%, distributing the rest as dividends.

This is partly because the company’s key asset — its intellectual property — is intangible. That means the firm doesn’t have to keep reinvesting the way it would in equipment or factories.

On top of this, the UK stock trades at a lower price-to-earnings (P/E) multiple — 23, compared to 36 for Microsoft. So while Microsoft is a terrific business, I’d prefer Games Workshop right now.

The stock isn’t entirely without risk. With around 44% of sales coming from the US, the firm could be disproportionately affected by weak consumer spending across the Atlantic. 

Over time, though, I think the company’s intellectual property will prove to be a durable asset as well as a valuable one. It’s been the key to the firm’s success to date and I expect this to continue.

Bargain prices

The other advantage to looking in the UK for shares to buy is that they often trade at more attractive prices. FTSE 100 equipment rental firm Ashtead Group is a good example. 

At a forward P/E multiple of 18, Alphabet is the cheapest of the Magnificent Seven stocks based on next year’s earnings. But Ashtead is significantly cheaper at a forward P/E ratio of 14. 

Despite the lower price tag, the FTSE 100 company isn’t obviously a lower-quality business. Over the last 10 years, it has consistently achieved a higher return on equity (ROE) than Alphabet.

As always, though, there are risks. And investors considering buying Ashtead shares should note the firm’s earnings declined significantly during the Covid-19 recession. 

Alphabet, by contrast, kept growing during this period. And the ability to keep pushing through a difficult economic environment is a sign of strength that shouldn’t be underestimated.

Over the long term, though, I’d rather buy shares in Ashtead. Earnings might fluctuate over any couple of years, butI think there’s durable growth ahead at an attractive price today.

Warren Buffett

Of the Magnificent Seven, the only stock Warren Buffett has really invested in is Apple. And the Berkshire Hathaway CEO has been selling that stock recently.

I think this is significant. While I wouldn’t advocate copying anyone else’s investments without careful thought, Buffett’s record shows investing success doesn’t depend on buying big tech.

As a result, I’d prefer to focus on other opportunities at the moment. And Games Workshop and Ashtead are a couple of UK growth stocks that I think stand out.

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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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Apple, Berkshire Hathaway, and Games Workshop Group Plc. The Motley Fool UK has recommended Alphabet, Apple, Games Workshop Group Plc, and Microsoft. 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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