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Why this super growth stock could be heading for the FTSE 100

Disruption is a popular word in investing. But how many companies can genuinely claim to be disruptive? One possible example is investment supermarket Hargreaves Lansdown (LSE: HL), which has grown over 35 years from an investment newsletter into a £10bn FTSE 100 company.

As I’ll explain, I think Hargreaves Lansdown may still have a lot to offer investors. But if you’re looking for a genuine disrupter with the ability to deliver multi-bagging gains, I think you need to look elsewhere.

Shaking up the market

Foreign exchange specialist FairFX Group (LSE: FFX) aims to shake up the international payments market. Competitive exchange rates and flexible online services have enabled the group to build a business that’s on track to double its turnover to £2bn this year.

This turnover figure includes the value of exchange transactions. But this rapid growth is also flowing through to the group’s revenue, which rose by 97% to £12m during the six months to 30 June.

Increasing economies of scale also enabled the group to deliver a substantial pre-tax profit of £2.6m, up from just £0.2m during the same period of 2017.

Why I’d keep buying

Customer numbers rose by 182,171 to 911,156 during the half-year period. Although this includes acquisitions, it’s clear to me that demand for the firm’s services is growing. According to today’s figures, turnover during July and August was £472m, 152% higher than during the same period last year.

Alongside foreign exchange services, the company is also expanding into areas such as online banking and pre-paid cards.

Broker forecasts suggest a full-year profit of £7.7m — or 4.9p per share — in 2018. This puts the stock on a forecast P/E of 28, which doesn’t seem excessive to me.

I believe this company has the potential to become many times larger than it is at the moment. The shares look like a buy to me.

Going all the way

One of the rewards for disruption can be abnormally high profit margins. Hargreaves Lansdown has become one of the most profitable companies on the London market. During the year ended 30 June, the firm reported an operating margin of 65% and a return on capital employed of 72%.

There have been suggestions that growing competition could drive down Hargreaves’ profit margins. So far this hasn’t happened. Nor have regulatory changes affected the group’s profitability.

One reason for this is the firm’s size. Last year the group attracted net new business of £7.6bn. This took total assets under administration to £91.6bn.

Looking after these investments for the firm’s 1.1m clients generated revenue of £447.5m. This represents less than 0.5% of the value of assets under administration.

This suggests to me that the firm’s charges are not unreasonably high. Customers seem to agree. Hargreaves’ share of the direct platform market — which allows investors to buy funds — rose by 1.3% to 39.1% last year. The group’s share of the execution-only stockbroking market rose by 1.7% to 31.3%.

Keep calm and carry on

Analysts expect the group to deliver earnings growth of 17% this year, and about 15% next year. Although the stock looks expensive on 39 times 2019 forecast earnings, this valuation reflects its exceptional profitability.

A forward dividend yield of 2.1% also looks worthwhile to me. This payout rose by 11% last year and was also boosted by a special dividend. I’d sit tight and buy more on the dips.

Capital Gains

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.