Warren Buffett attributes the success of his Coca-Cola and American Express investments to the fact the companies have grown, not the dividends they’ve paid. In other words: growth stocks can be great.
The trouble is, a lot of businesses need time to increase their earnings. And I think some of the best growth stocks should only be considered by investors with a long-term focus.
Halma
Over the last 12 months, Halma (LSE:HLMA) shares have climbed 27%. That’s a great return, but I don’t think investors should bet on something similar happening again in 2025.
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The stock currently trades at a price-to-earnings (P/E) ratio of 36 (or 31 based on the firm’s adjusted figures). And the company isn’t Nvidia – it’s not likely to double its profits in the next year.
I think, however, that its long-term prospects are enough to justify the current share price. Halma’s strategy involves buying other businesses and integrating them into its network.
Typical acquisition targets occupy dominant positions in niche markets, making them difficult to disrupt. But it can also mean their scope for growth is limited and this is a risk given the high share price.
Halma can generate some growth by integrating subsidiaries into its ecosystem. Ultimately, though, the success of the business is going to come down to the firm finding enough companies to buy.
Management reported a strong acquisition pipeline in the firm’s latest trading update. I think the stock could turn out to be a great investment, but it’s not going to happen overnight.
Palantir
Palantir (NASDAQ:PLTR) is a very different case. I think there’s a decent chance the firm’s profits may double in the next 12 months, but at a P/E ratio of 345, the stock will look expensive even if they do.
Historically, the company has relied heavily on government contracts. And with these continue to make up a big part of revenues, there’s an ongoing risk of policy changes and budget shifts.
Recently, though, Palantir has shifted to targeting businesses to sell to, and the early signs are encouraging. It seems as though companies can’t sign up fast enough when they see what Palantir can do.
Whether it’s bottled water or agricultural software, the firm’s analytics products appear to be able to generate impressive insights for their clients. And I think this is very promising.
There’s a lot of optimism about what artificial intelligence (AI) might mean for various businesses. But Palantir is one of the few companies that actually has a working AI product that produces real results.
It’s going to be a long time before the firm is in a position to return cash to shareholders in a way that amounts to a good return on the current share price. I think, though, that patience could pay off here.
Long-term investing
Unless they fall sharply, neither Halma nor Palantir stock is going to look cheap in the next couple of years. And while anything can happen, I don’t think investors should look for a return in that time.
Over the long term, however, both companies have outstanding growth prospects. There are risks in both cases, but I think either stock could turn out to be a great investment at today’s prices.
