Growth stocks are every investor’s dream with huge returns over a relatively short period of time. However, well known growth stocks often have high valuations attached to them, this means investors must decide how much future success has already been priced-in. Today I’m looking at whether some of London’s most popular growth stocks really have what it takes to make huge returns for investors buying now.
Boohoo.Com (LSE: BOO) is an online fashion retailer headquartered in Manchester. It sells own brand clothes and accessories which is a striking difference to its peers and one that investors love. The financials look good too, profit is steadily increasing as is the cash balance of the business. For an online fashion stock the forward PE ratio of 30.5 isn’t insane and earning per share growth of 27% is very encouraging.
Revenue is set to hit £240m next year with profits expected to be close to £18m, double the 2015 full-year profit. If these expectations are achieved then the shares should perform extremely well.
The shares of the popular online takeaway company Just Eat (LSE: JE) have performed very well since floatation last year. The company is a fantastic growth prospect with profit forecasted to eclipse £100m next year and analysts are talking about a potential 2017 dividend. The company has a PEG ratio of only 0.68, which shows that there’s room for the shares to fly.
The company has had a tough 2015 with lower profits but many believe it’s an obvious takeover target for huge online businesses like Amazon and Uber. There is, however, increasing competition in this space, companies like Deliveroo are cutting into the market and taking market share.
Another growing internet company is the online property business Zoopla Property Group (LSE: ZPLA). Zoopla owns a number of online property brands that provide information to consumers. There are nearly 20,000 estate agents, letting agents and developers on the website. Zoopla has become an invaluable resource to use when buying a house but the business hasn’t reflected this success.
Profits have been around the £22m mark for three consecutive years, which means the company trades on a PE of 21.1. This is relatively low for a growth stock so there’s scope for a considerable share price increase if the company begins to deliver on growth promises. The UK housing market remains robust and I think the stock may do well over the next few years if growth targets are met. Profit could more than double between 2015-2017.
Growth stocks are tough to find and I believe the three above are some of the best picks in London. Growth stocks must keep growing ever bigger to justify the lofty PE ratios attached to the shares and if growth stagnates then shares could fall sharply. I believe the risk is worth the reward, invest in the right growth stock and you can see returns many times the size of your original investment.
Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.