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The FTSE 250 growth stock I’d buy in March

The FTSE 100’s rise in recent months has been highly beneficial for wealth management companies. Their fees are often linked to the level at which the index trades, so a higher index normally boosts their bottom lines. However, even if the FTSE 100 fails to make gains over the coming months, this stock could record strong earnings growth. That’s a key reason why it could be worth buying in March.

Upbeat performance

The recent results from Rathbone (LSE: RAT) show that the company is making strong progress with its strategy. Its total funds under management increased by 17.1% to £34.2bn in 2016. This is ahead of the FTSE 100’s rise of 14.4% and the FTSE WMA Balanced Index’s increase of 13.6% over the same time period. The total net annual growth of funds under management for Investment Management was 4.5%. This comprised £0.8bn of net organic growth and £0.4bn of acquired inflows.

Rathbone’s underlying operating expenses increased by 11.1% in 2016, which largely reflects the investment it is making in strategic initiatives. However, they should create a more efficient business which is better able to deliver consistent profit growth over the medium term.

Outlook

In fact, over the next two years, the company’s bottom line is forecast to rise by over 15%. This is a relatively robust rate of growth, but the real opportunity for investors to record capital growth could be from an upward rerating. In the last five years, Rathbone has traded on an average price-to-earnings (P/E) ratio of 18.1. If it meets its forecasts over the next two years and its P/E ratio reverts to its mean, it could be trading as much as 13% higher than it is today.

In addition, it currently yields 2.8% from a dividend which is covered 2.1 times by profit. When added to its potential capital growth in 2017 and 2018, this means that a total return of close to 20% could be on the cards by 2019. These returns would not be contingent on the FTSE 100 making similar gains during the next two years. As such, now could be the right time to buy a slice of the business.

Value for money

Rathbone’s attractive valuation is perhaps best evidenced when it is compared to sector peer Hargreaves Lansdown (LSE: HL). It trades on a P/E ratio of 31.5. While its earnings forecasts of 13% growth per annum in the next two years are superior to those of Rathbone, Hargreaves Lansdown does not appear to deserve such a premium valuation. After all, its financial performance is also closely linked to the wider index, and so it remains a relatively cyclical stock to own.

Both stocks have strong track records of growth, with profit growth recorded in four of the last five years in both cases. They also offer sound strategies and the financial strength to cope with a prolonged downturn in stock markets. However, due to its lower valuation, Rathbone seems to be the more enticing purchase for the long term based on its superior risk/reward ratio.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.