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One growth stock I’d buy today and one I’d avoid

I am absolutely convinced that Homeserve’s (LSE: HSV) improving footprint across the Atlantic should unlock bright profits growth in the years ahead.

The emergency callout specialist advised in July that “momentum in North America remains strong,” Homeserve adding 2.5m more households in the period spanning April 1 to July 20, thanks to 24 partner signings. It now has 53m homes on its books in the US.

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But its Stateside operations are not the only reason to be optimistic. Indeed, it also continues to invest heavily in its non-US divisions to deliver brilliant revenues growth.

In August the firm paid £5m to acquire Help-Link, a major player in the UK domestic boiler installation market, a decision that will help it on its path from just dealing with emergency callouts to becoming a significant operator in the much larger home repairs and improvements segment.

One I’d buy…

So it is unsurprising that City brokers are expecting earnings to keep on growing by double-digits in the medium term at least — bottom line rises of 16% and 11% are predicted for the years ending March 2018 and 2019 respectively.

Homeserve’s share price has detonated 33% since the start of the year, illustrating the groundswell of optimism surrounding the FTSE 250 star.

So while the company deals on a forward P/E ratio of 26.4 times (sailing outside the broadly-regarded value territory of 15 times or below), I reckon the potential for explosive earnings expansion in the near term and beyond still makes it a share worth loading up on.

… and one I’d sell

Investor appetite for System1 Group (LSE: SYS1) has certainly been less impressive of late. Its market value has slumped 36% since the middle of August, and Monday’s trading statement does not suggest that it will be reversing these losses any time soon.

The marketing services specialist advised that business has remained slower than expected during the first half of the fiscal year, forcing gross profit for the April-September period 9% lower year-on-year, or 12% at constant currencies.

Meanwhile, pre-tax profit is said to have collapsed to just £800,000 for the half year from £2.8m in the corresponding 2016 period.

System1 said that the drop was “due in the main to non-recurrence of large one-off Innovation projects as a result of some significant client spending reductions and a more competitive market.”

And the London-based business does not see any light at the end of the tunnel either, cautioning today that “[we] remain cautious about our prospects over the remainder of the financial year due to our usual lack of revenue visibility.”

It took a tumble back in August when it announced that continued trading troubles would see half-year profit fall between 6% and 11%. Although the business advised that it had witnessed “more encouraging signs recently,” this has not been borne out in today’s market release.

The City is expecting earnings to rise 14% in the year ending March 2018, with a further 7% advance chalked in for fiscal 2018. But today’s statement suggests that earnings could fall well short of these forecasts.

While a prospective P/E ratio of 15.4 times is hardly eye-watering on paper, this could still lead to further erosion in the share price should market conditions continue to slide, a very real possibility in my opinion.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Homeserve. 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.