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These sliding growth stocks could still smash the FTSE 100

Shares in Patisserie Holdings (LSE: CAKE), the company behind Patisserie Valerie-branded cake-and-coffee destinations, soared 7% this morning after reporting a 20% leap in 2017 profits.

After the rise the shares trade on a P/E of 20, but this seems a fair price considering the momentum behind this rollout story. The company opened 20 new locations in 2017, ending the financial year with 199 branches.

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This rapid expansion is self-funded too: the company generated £24m in cash from operations and spent only £9.3m on growing the estate. Given the significant free cash-flow thrown off by the company and a £21.5m net cash position, it has scope to increase the pace of this rollout in the future. 

The firm has impressed me with its cost management skills – while other casual dining outfits are suffering from increasing cost pressures from the rising minimum wage and weak sterling, gross margins have held steady at Patisserie Holdings.

After successful English expansion, the company has turned to Ireland and Scotland to drive further growth. It has only just begun testing the waters in these markets, operating from only five locations, but given its past operational excellence, the growth plans seem promising.

Auto Trader motors on

Shares in Auto Trader (LSE: AUTO) have struggled this year as Brexit cast a shadow over the UK auto market. Weakened sterling has resulted in price inflation for purchases of imported vehicles. Sales of new vehicles have fallen for seven straight months, so its no wonder investors are cautious of the firm.

The company is the UK’s largest automotive marketplace for new and used cars, with an audience three times larger than its nearest competitor. Roughly 80% of UK automotive retailers advertise on the website.

Despite the gloomy outlook, it grew revenues by 7% and profit before tax by 10% in the first half. The shares are currently 24% down from their 2017 peak and, trading on a P/E of 18, it looks an interesting prospect given its clear dominance in online used car sales.

The company’s capital-light business model continued to generate tons of free cash-flow that was used to reduce debt to £347m, to buy back £36m shares and to pay £34m in dividends.

According to CEO Trevor Mathews, Auto Trader’s dominance in the used car markets explains the company’s resilient results. It looks set to meet full-year profit expectations of roughly £171m. Given its dominant position, 65% operating margins and solid free cash-flow generation, I believe Auto-Trader could beat the market for years to come.

While the shares might perform weakly in the short-term due to tough market conditions, the sheer size of its marketplace grants it a competitive advantage over its peers that should facilitate long-term outperformance. 

In my view, both Auto Trader and Patisserie Holdings could be wonderful, durable investments for those following a buy-and-hold strategy. 

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Zach Coffell owns no position in any shares mentioned. The Motley Fool UK has recommended Auto Trader and Patisserie Holdings. 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.

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