Finding stocks with high growth rates can be challenging. In many cases, they trade on valuations which make them difficult to justify from an investment perspective. However, the reality is that for investors seeking to generate high returns in the long run, growth stocks could be the best place to invest. The stock market has historically rewarded those companies which are able to offer above average growth on a consistent basis. Here are two such companies which could be worth buying at the present time.
Banking sector potential
The UK banking scene has been shaken up in recent years by challengers such as Metro Bank (LSE: MTRO). It has sought to provide a differentiated product to customers by embracing technology and a greater focus on customer service. This seems to have been popular with consumers, since the company’s bottom line is due to move from loss to profit in the current year.
In fact, this is forecast to be followed by earnings growth of 132% in 2018. Since Metro Bank trades on a price-to-earnings growth (PEG) ratio of just 0.3, it seems to offer a wide margin of safety as well as significant upside potential. Certainly, that rate of earnings growth is unlikely to continue in the long run. But with the banking sector changing rapidly as technology developments continue, Metro could offer double-digit earnings growth over a sustained period.
Looking ahead, the UK economy may endure a challenging year, with Brexit negotiations set to start shortly. This may cause consumers to hold back on major purchases, such as houses, and lead to a downgrade in Metro’s forecasts. However, this seems to already be priced-in thanks to its low valuation. Therefore, for investors looking to generate high returns in the long run, it could be a sound stock to buy.
Cyber security is becoming a more valuable service. The threat of disruption to everyday life increases as businesses and individuals depend on technology to an ever-increasing extent. Therefore, investing in a cyber security company such as Sophos (LSE: SOPH) could be a sound move.
The company is forecast to record a rise in its bottom line of 71% next year, followed by 25% the year after. While it trades on a price-to-earnings (P/E) ratio of 55.8, when combined with its growth outlook this equates to a price-to-earnings growth (PEG) ratio of just 1.2. This seems to be a reasonable price to pay given the company’s potential to record double-digit earnings growth over a number of years.
The fact that Sophos is expected to increase dividends per share by 80% between 2016 and 2018 indicates its management team is confident in the long-term outlook of the business. While its 1.2% yield means it is a long way from being an income stock, investor sentiment could improve as its shareholder payouts increase. Therefore, now seems to be the right time to buy a slice of the business for the long term.
Of course, Sophos and Metro Bank aren't the only companies that offer high growth potential. However, finding the fastest-growing stocks can be challenging when work and other commitments get in the way.
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Peter Stephens 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.