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The super growth stock I’d still sell to buy this FTSE 100 winner

Famed US fund manager Peter Lynch believed that private investors could gain an edge over Wall Street by spotting good investments in their everyday lives.

Hotel Chocolat Group (LSE: HOTC) certainly seems like the kind of firm Lynch might have chosen. The company’s shops feature on high streets all over the UK and its expensive chocolates have become popular gifts, helped by strong premium branding.

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Today’s results from the chocolatier also seem promising. Sales rose by 15% to £71.7m during the six months to 31 December. Pre-tax profit was 15% higher too, at £12.9m, while earnings per share climbed — you guessed it — by 15% to 9p.

As these figures suggest, margins were flat last year with operating margin broadly unchanged at 18.4%.

Where’s the growth?

Today’s accounts show a cash-generative business with high profit margins. But growth seems disappointing to me. The market seems to share this view, as the stock has ticked 3% lower so far today.

Although sales rose by 15% during the first half, 5% of this increase came from 10 new store openings. A further slice of revenue growth came from online, where revenue rose by 13%.

The company chooses not to provide a breakdown of revenue between shops and online. Nor does it reveal like-for-like sales growth from established shops.

However, the information provided seems to suggest that like-for-like store sales rose by considerably less than 10% during the first half, even though this included the key Christmas trading period.

I’m not convinced that this business has the strong momentum it needs to become a superstar growth stock. The shares might appeal at a lower price, but with a price-to-earnings growth ratio of 2.3 and a forecast P/E of 36, Hotel Chocolat looks too expensive to me.

One ‘expensive’ stock I’d buy

If you’re happy to pay a premium price for a top quality product, I believe that FTSE 100 gold miner Randgold Resources (LSE: RRS) could be a better choice.

Although gold is a famously uncertain investment, chief executive Mark Bristow has built a very profitable and robust business in Africa by focusing relentlessly on cost and quality.

While several other gold miners have experienced financial distress in recent years, Randgold’s profits have bounced back rapidly since 2015.

Gold production rose by 6% to 1.3m ounces last year, while profits rose by 14% to $335m. Lower cash costs helped the firm to end the year with net cash of almost $720m, up from $516m one year earlier.

Cheaper than chocolate

Randgold reached a landmark last year, completing an eight-year programme to build and commission its giant Kibali mine in the Democratic Republic of Congo. Mr Bristow says the group is now positioned “to increase net cash flows” which will be used for dividend growth and future expansion.

The dividend was doubled to $2 per share last year, and is expected to rise by a further 40% to $2.79 per share in 2018. This payout gives a prospective yield of 3.2% and should be covered by free cash flow and profits.

Earnings per share are expected to rise by 23% this year, giving a forecast P/E of 23 and a PEG ratio of 1.4. For investors wanting exposure to gold, I think Randgold could be a top choice.

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It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

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Roland Head has no position in any of the 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.

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