The Motley Fool

One growth share I’d buy today, and one I’d sell

I love a set of results that’s headlined “A Year of Strong Growth and Development“, and that’s what DCC (LSE: DCC) is saying about its results published Tuesday.

It operates in sales, marketing, distribution and other business services, plying its trade in the energy, technology and healthcare sectors. And all of its divisions have “recorded strong profit growth” in the year.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

A bumper year

We saw operating profit up 21%, with adjusted earnings per share up 18%, driven by the firm’s energy division’s outstanding profit rise of 24%. Free cash flow is up by a massive 43%. The dividend was boosted by 15%, though the yield stands at only a modest 1.6%.

For me, DCC looks very attractive on the long-term growth front, with chief executive Tommy Breen predicting another year of profit rises ahead.

As well as organic growth, DCC is active on the acquisition front and is expanding globally, ambitiously snapping up Esso’s retail network in Norway and Shell’s LPG business in Hong Kong and Macau. These overshadow the disposal of its environmental division (for an enterprise value of £219m), and should help it focus on more profitable businesses.

Its recent track record is impressive, with earnings per share growing by 67% in just four years, and we have growth in excess of 10% per year forecast for this year and next.

As I write, the shares are down 3% at 7,135p. That gives us a P/E of a little under 20 on 2019 forecasts, which might put some people off. But for me that’s a fair valuation for a company with the growth potential that I’m seeing here. 

Heading for the cliff?

First Derivatives (LSE: FDP), a firm supplying IT services to the financial sector, also filed an impressive set of results on Tuesday.

Adjusted pre-tax profit came in 24% ahead with adjusted EPS up 19%, and the dividend was lifted by 18% (albeit for a yield of only 0.8%). Net debt looks modest at £13.5m.

With its software subscription model, First Derivatives has good visibility, and says the current year is off to “an encouraging start“, with chairman Seamus Keating saying “we anticipate another year of strong growth“. Its software does seem to be going places, with an increasing number of companies taking it up.

Sky-high shares

If you’re looking for a share price that has soared, look no further — First Derivatives shares are up more than 400% in the past five years, to 2,560p. But the problem for me is that earnings, while appreciating impressively, haven’t kept growing at the same rate. That’s led to a steadily ballooning P/E — forecasts put the shares on a multiple of 45 for the coming year, and that makes me more than a bit twitchy.

I’ve been following growth shares for years, and there’s a common pattern where great results keep rolling in, investors keep on buying the shares, and the price gets unsustainably ahead of rationality. What usually happens is that one set of results comes in perhaps a little below expectations, and the result is a panic sell-off. 

And I see a distinct possibility of that happening here. I’m convinced that First Derivatives is a solid growth company with a very attractive future. But for me, the current share price is just too high.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.