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£3k to invest? 2 growth stocks I’d buy to beat the State Pension

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If you’ve still got time on your side before you hope to retire on a State Pension of only around £8.5k a year, then investing in quality growth stocks could be a good route to long-term riches.

The reason for this is that successful growth businesses can often multiply in value many times before reaching maturity. Investing relatively modest amounts now could allow you to enjoy an impressive retirement income in the future.

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Today I want to look at two businesses I think have the potential to continue expanding for many years.

Customers can’t get enough

Not content with buying chocolates in-store and online, Hotel Chocolat Group (LSE: HOTC) fans are now queueing up to buy the firm’s new Velvetiser in-home Hot Chocolat maker. The company said initial sales of the device — which retails at £99.99 — were six times greater than expected.

I suspect this price tag includes a hefty profit margin. But perhaps more importantly, it also ties customers into buying the firm’s single serve hot chocolate pouches, which retail at £12 for 10. This business model reminds me of the runaway success of Nespresso coffee and its imitators. And who doesn’t like “barista-grade hot chocolate”?

Of course, the Velvetiser is only a small part of the firm’s business at the moment. The good news is that growth is continuing elsewhere. During the six months to 30 December, sales rose by 13% to £80.7m, while pre-tax profit climbed 7% to £13.8m.

The company also reported a welcome 18% increase in operating cash flow. Despite opening 14 new stores, the group ended the period with net cash of £21.8m, up from £18.3m one year earlier.

A sweet-tasting buy?

Hotel Chocolat’s financial performance looks good to me, although I think it’s worth pointing out that earnings per share growth of just 7% is not exactly stellar. The group’s operating margin of 11% isn’t that amazing, either.

However, there are two things that do really impress me about this business. The group’s return on capital employed of 26% indicates that money invested generates attractive profits.

And although I’m not personally a fan of the product, the group’s continued growth and recent expansion to Tokyo and New York suggests that Hotel Chocolat could become a genuine premium brand.

The shares trade on 31 times forecast earnings for the current year, and offer a yield of just 0.6%. But if founder Angus Thirlwell can build this into a global luxury brand, I think today’s share price could look cheap in five to 10 years.

An under-the-radar growth bargain?

My next pick is also a branded consumer goods firm. Stock Spirits (LSE: STCK) produces a range of branded spirits which are mainly sold in Central and Eastern Europe and Italy.

The company recently reported a 27.8% share of the off licence vodka market in Poland. It also has a 34.2% share of the spirits market in the Czech Republic. In Italy, Stock is the number one branded grappa business and has strong positions in limoncello and brandy.

Last year, the group’s total sales rose by 8.7% to €282.4m, while operating profit rose by 16.8% to €48.7m. Cash generation looks good to me and the shares offer a useful dividend yield of 3.7%.

In my view, Stock Spirits’ 2019 forecast price/earnings ratio of 14 could make the stock a bargain buy, if the company can maintain recent growth.

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