I recently screened for some high growth stocks, listed in the UK. After looking for shares with earnings per share (EPS) growth greater than 30% and at least five years of consecutive EPS growth, only six shares came up. Of those, two in particular caught my eye as possible additions to my investment portfolio.
A high growth stock
Gamma Communications (LSE: GAMA) is a UK tech share I added relatively recently to my portfolio. It develops and sells communications and software services to small, medium and large businesses, enabling home working and effective customer contact, for example.
The Gamma Communications share price has momentum and there are a few reasons to think the shares, although expensive already, could re-rate higher.
The main catalysts for continuing strong growth that I see are new product development, expansion into new European markets, increasing the number of channel partners it sells through and increases in hybrid and home working.
The company still has a lot of room to grow outside the UK. It only gets about 12% of revenues from Europe, the rest is from the UK.
The main risks with this company from an investor perspective, I think, are the possibility it expands too quickly and management takes its eye off the ball, or overstretches the balance sheet. This is always a risk for fast-growth companies. The other is overpaying for acquisitions. I have some concerns about the £40.2m purchase of Mission Labs, as that company only has revenues of £3.4m.
Overall though, I think Gamma Communications is a company that can continue to grow strongly and I’ll likely add further to my currently very modest position.
Facing problems but with massive growth potential
I’ve not always had the most positive opinion on fast fashion retailer Boohoo (LSE: BOO), especially following its well publicised ESG failings. It was found that manufacturing outsourcers were paying workers less than the minimum wage. These failings have hit the share price – and any further revelations could do so further.
There is an ongoing risk of legal action in the US in relation to alleged misleading discounts. Another risk in my view is consumers demanding fast fashion becomes more environmentally-friendly, especially as Boohoo caters to a younger demographic.
That said, customers continue to like it and this translates into its strong, consistent growth. For me, the ongoing growth potential is the main reason I’d consider buying the shares.
The shares have become much better value and now trade on a forward P/E of 22. Before the bad press, the P/E would have been well over 40, and sometimes more than triple where it is now.
Revenue has gone from £195m in 2016 to £1.24bn in 2020. Over the same timeframe, operating profit went from £15m to £91m. Return on capital employed has been steady in recent years at around 25%, which is very good.
While it faces some challenges, which could tarnish the brand, it remains probably one of the fastest growing UK companies. For that reason, I’ll at least consider adding it to my portfolio this month.
Andy Ross owns shares in Gamma Communications. The Motley Fool UK has recommended Gamma Communications and boohoo group. 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.