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2 hot growth stocks you may regret not buying

While many companies enjoyed stellar share price rises over 2017, separating those that will continue to climb in the next year from those that may retrace is no easy task for investors. But here are two companies that I think have a better chance than most of falling into the former category.

Rising revenues

Today’s Q1 trading update from £1.3bn cap specialised technical products and services supplier Diploma (LSE: DPLM) gives some indication as to why the company became rather popular with investors over the second half of last year.

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Group revenues climbed 10% in the three months to the end of December compared to the same period in 2016. When currency fluctuations are taken into account, this number rises to 14%, with 8% of this figure coming from underlying growth and the remaining 6% coming from acquisitions completed over 2017.  Although impressive, the company did state that sterling’s recovery in the second half of the year had “provided an overall headwind of 4%” to those revenues reported.  

Broken down, Diploma reported a rise of 20% in revenues at its Life Sciences sector — boosted by the acquisition of diagnostic firm Abacus dx in spring last year. Its Seals sector benefited from “strong trading activity” in North America, making up for weaker performance in Australia and Russia. Revenue at the company’s third sector — Controls — rose by 7% thanks to better trading in Europe. All told, today’s statement was really rather positive.

As a result of rising 18% since September, shares in Diploma aren’t the deal they once were. Indeed, estimates for the current financial year leave the stock trading on a somewhat pricey 22 times earnings. At 2.3%, the dividend yield isn’t anything to get excited about either.

Nevertheless, recent trading combined with the company’s attractive balance sheet (£21.9m cash position), and suggestions that it will continue to seek out acquisitions as part of its growth strategy, all suggest to me that last year’s positive momentum should continue. More news regarding its search for a new CEO could provide a further boost to the shares.

Another high-riser

Like Diploma, polymer manufacturer Victrex (LSE: VCT) enjoyed a positive 2017. Over the last year, its shares climbed 35% — a very encouraging performance given the size of the company. 

December’s full-year results revealed a 15% rise in group revenue (or 3% in constant currency) to just over £290m despite “expected and significant reduction” in Consumer Electronics volumes. In addition to an 11% increase in pre-tax profit, the company also reported a stonking 88% rise in the amount of cash on its balance sheet to £120.1m. Given this, it’s perhaps no surprise that management approved a 15% hike to the regular payout, in addition to a special dividend of 68p per share.

Despite the recent strengthening of sterling, Victrex begins 2018 with “positive growth momentum,” according to CEO Jakob Sigurdsson. Its pipeline “remains strong” with the company continuing to target 10%-20% of sales from new products in the medium term, compared to just 4% in 2017.

Unfortunately, grabbing a slice of the action will cost prospective investors a lot more these days. Right now, Victrex’s shares trade at 21 times forecast earnings — a valuation not dissimilar to those of Diploma.

That said, with its focus on investing for growth (through partnerships, alliances, and acquisitions) and a track record of generating excellent returns on the money it puts to use, I consider this an excellent addition to any growth-focused portfolio.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Victrex. 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.