Several growth stocks appeal to me right now. And I’d buy them if I had spare cash to invest.

For example, I like the look of Ricardo (LSE: RCDO), the strategic, environmental, engineering and consulting company. The business has a history of innovation and trading stretching back more than 100 years. But today it’s working at the cutting edge of some of the world’s most pressing scientific and engineering challenges.

The firm specialises in the transport, energy and scarce resources sectors. And that means it works on solutions for passenger cars, commercial vehicles, rail, defence, motorsport, energy and the environment. 

Diverse sector coverage

Ricardo’s client list includes transport operators, manufacturers, energy companies, financial institutions and government agencies. And the company takes on assignments such as strategy development, cost reduction, safety management, regulatory compliance and environmental impact assessments.

But Ricardo is more than just a consultancy. It also has in-house engineering capabilities for the design of “high-quality” prototypes and low-volume manufacturing of “complex” products and assemblies. For example, engines, transmissions, electric motors, generators, battery packs and fuel cell systems.

On 14 September, Ricardo delivered a decent set of full-year growth figures and reported “strong order intake”, up 23% year-on-year. And I think that bodes well for the future growth of the business. City analysts expect double-digit percentage advances in earnings for the current trading year to June 2023 and for the year following.

However, earnings and the dividend collapsed in 2020 when the pandemic struck. And the directors have since rebased the shareholder payment lower. 

I think that move emphasises that the business has some vulnerabilities and could be sensitive to economic cycles. Indeed, at around 450p, the share price is much lower than its 2018 peak above 1,000p. 

Nevertheless, despite the risks, I’d be tempted to add Ricardo to my long-term diversified portfolio. And the forward-looking earnings multiple is just above 12 for the trading year to June 2024.

Robust earnings growth

But I’m also keen on international event, intelligence and scholarly research company Informa (LSE: INF). The enterprise consists of “two leading scale businesses and dozens of brands with strong market positions”. 

And the organisation’s aim is to provide other businesses and professionals knowledge to help them remain “well-informed, effective and successful”. Informa delivers on its mission by providing digital-first and data-driven products and services alongside live and on-demand events.

In November, the firm reported underlying revenue growth of 41% year-on-year for the period from January to October. And the company explained the increase by pointing to “accelerating international B2B Markets growth, improving performance in Academic Markets, and continuing US operating expansion”. 

The outlook statement was bullish. And City analysts expect earnings to rocket higher by almost 50% in 2023. However, the multi-year record for revenue, earnings, cash flow and shareholder dividends is patchy. And that suggests the business may be vulnerable to general economic cycles.

But I’d be inclined to embrace the risks and add the stock to my portfolio while the share price is around the 614p level. It’s not a cheap share. The forward-looking earnings multiple is running just above 17. But there could be further growth in the business in the years ahead.

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Both are well-respected engineering companies with strong track records. For this reason, I’m starting to think that the current weakness could be a buying opportunity, despite the risk that markets still have further to fall.

Headwinds

FTSE 250 firm Meggitt (LSE: MGGT) makes sensors and braking systems for jet airliners. These products account for more than half the group’s revenue and enjoy a big market share. According to the company, its products are installed on about 73,000 aircraft today.

Any slowdown in this business could be bad news. Unfortunately that’s what happened last year when the Boeing 737 MAX was grounded. The US manufacturer subsequently slowed and then suspended production of this aircraft.

This has caused a lot of pain for many of Boeing’s suppliers. Meggitt is in a relatively strong position as it’s also a supplier to rival aeroplane manufacturers Airbus, Embraer and Bombardier. Outside civil aerospace, Meggitt also has a sizeable defence business, providing further diversification.

Ready for lift-off?

In its annual results today, Meggitt said that revenue rose by 9% to £2,276.2m in 2019, while pre-tax profit climbed 11% to £370.3m. It’s a respectable performance, but the shares are still down by nearly 5% today.

I think the main reason for this is management’s warning that performance in 2020 will be influenced by the “uncertain timing relating to the return to service of the 737 MAX”. The coronavirus outbreak may also be a factor too, if it affects global air traffic growth.

However, none of this is a surprise. Meggitt shares have already fallen by about 15% from their January peak of 700p. At about 565p (last seen), I think the stock is starting to offer much better value for long-term buyers.

Meggitt’s finances look healthy enough to me. Cash generation is fairly good. The stock now trades on about 15 times forecast earnings, with a dividend yield of 3.3%. Although further falls are possible, I would consider buying at this level.

Down 15% today

Even before the coronavirus outbreak hit the headlines, new car sales were falling in many countries. This situation has now got a whole lot worse. Recent trade press reports I’ve seen suggest that car sales fell by 92% in China during the first half of February. Nearby markets are suffering too.

Falling new car sales are not good news for £400m engineering group Ricardo (LSE: RCDO), which makes high-tech parts for many car manufacturers. The company said today that it expects to see automotive orders fall in the US, EMEA and China regions.

Wider disruption to the firm’s operations in China is also causing problems. Management now expect profits for the year ending 30 June to be significantly lower than previously expected.

It’s not good news, and the shares are down by 15% as I write. But Ricardo also operates in other sectors, such as defence and renewable energy, where demand remains strong.

I’m impressed by this firm’s long track record and expect its performance to recover. With the shares now trading on just 12 times 2021 forecast earnings and offering a yield of about 3.6%, I think Ricardo could make sense as a long-term buy.

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Ricardo is a collection of consultancy businesses, which offer advice to the engineering, technical and environmental sectors. The company has reported steady growth over the past six years, with net profit growing at a compound annual rate of 2.3%. This rate isn’t particularly attractive, but what I’m interested in is the group’s future potential.

Booming market

According to its fiscal 2019 results, statutory earnings per share grew by 12% last year on the back of revenue growth of 2%. Further, the group’s order book expanded by 6% on a reported basis to £314m.

With the world becoming more and more concerned about the environment and the impact climate change might have on our day-to-day lives, I see a bright future ahead for Ricardo.

Demand for environmental consulting services is only going to increase going forward, and the company is well placed to capitalise on this growth. Indeed, commenting on today’s results, CEO Dave Shemmans said: “We continue to invest in technologies, services and digital products to aid our blue-chip clients — together we create sustainable solutions to address the key issues of climate change, air quality, global stability and the management of scarce natural resources.“

Double your money

So the market is there, Ricardo just needs to execute. Based on its track record, I believe it can. However, the market seems wary.

At the time of writing the stock is trading at forward P/E of just 11.5, even though City analysts are expecting double-digit earnings growth next year. I think this could be an excellent opportunity for growth investors to buy into a business with a bright future at a discount price.

On top of this, the shares support a dividend yield of 3%. If earnings continue to grow at around 10% per annum, even without any multiple expansion, I think this stock could double in value over the next two years.

Income champion

Another growth stock that I am eyeing up at the moment is Arrow Global (LSE: ARW). Arrow buys, services and collects non-performing loans. Put simply, it is a debt collector. Financial institutions and companies sell the business portfolios of unsecured and defaulted loans, and Arrow tries to make a profit by recovering the debts.

Ethical considerations aside, business is booming for the company. Over the past six years, net profit has grown at a compound annual rate of around 15%. City analysts expect the business to earn 36.8p per share this year, putting the stock on a forward P/E of just 5.8. Earnings growth of 17% is expected for 2020.

Arrow returns most of the cash it generated from operations to shareholders. Last year the company distributed 12.7p per share in dividends and this year analysts are forecasting a distribution of 13.2p. At the current share price, that gives an estimated dividend yield of 6.2%.

Based on all the above, I think shares in Arrow could be worth between 300p and 400p. This implies a total return of more than 100% over the next few years, including dividends.

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High value?

One thing I can’t help noticing, though, is the apparently high current value of the shares. The company is forecast to be back to a rising earnings trend this year, but even with that the shares are on a toppy-looking P/E multiple of around 22.5 even as far out as December 2020.

The reduced dividend is expected to be still low too, with a 2020 yield of a very modest 2% on the cards. On that score, we’re not looking at an obvious bargain. But I think there’s very much a quality effect happening here — in terms both of the general feel of Rolls-Royce as a quality company and a ‘flight to quality’ that’s been spurred by market fears and Brexit uncertainty.

What’s so good?

Do you fly on holiday? If you do, take a look at who made the engines for your plane. The chances are it will be Rolls-Royce or General Electric. Almost every time I fly, that’s what I see. There are a couple of others, with Pratt & Whitney making up the last of the ‘big three’, but it’s a tight market with not much competition and with massive barriers to entry.

Another key is the safety aspect of modern aviation. Jet engines are complex beasts and require regular inspection and service, and providing that is where Rolls makes its profits — once an engine is sold, it has a monopoly on being able to do that job.

Specialist

I think Rolls is a great long-term investment, but what’s the FTSE 250 stock that I think could beat it in 2019 and the medium term? It’s much smaller engineer Ricardo (LSE: RCDO).

It is big in a number of specialised engineering fields, including high-performance road and rail engines, marine products, and the emerging clean power generation field. While not as exclusive a market as Rolls’ big aero engines, it still needs the expertise that Ricardo has built up since its founding in 1915.

The six months to December 2018 has brought Ricardo a total order intake of just over £200m, ending with an order book valued at £300m. The company reached the end of December with net debt of £27.5m, which is significantly below its previous underlying full-year pre-tax profit of £39m. Absolutely nothing to be concerned about there.

Quality again

Again, I’m seeing the same combination of quality coupled with a relatively safe haven for times of stock market upheaval. But this time it’s a smaller company on a significantly lower valuation.

Earnings per share progress is going at modest single-digit rates at the moment, and in the current climate I think that’s petty respectable. But bearish sentiment has helped push Ricardo shares down 37% in the past 12 months, giving us forward P/E ratios of only around 10.

The shares are also offering predicted dividend yields of 3.5% this year and 3.8% next, covered around 2.8 times by earnings and rising steadily year-on-year.

I think Ricardo shares are simply too cheap.

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The first company on my list is price comparison giant Moneysupermarket.com Group (LSE: MONY). Investors seem to have fallen out of love with this stock over the last couple of years, as earnings growth has slowed.

I think this could be a mistake. Moneysupermarket’s latest accounts show that its business is more profitable than ever. Over the last 12 months, the company has generated an operating margin of 29% and a return on capital employed of almost 55%.

Such high returns mean that this business generates a lot of cash, supporting a generous dividend and growth investments.

Mortgages could be a game-changer

Moneysupermarket is working on a number of projects aimed at providing a more sophisticated service to customers in the future. One area on which the company is focusing is making it easier for customers to switch household service providers.

A second area is mortgages. This is a relatively poorly served area of the market at the moment, so I think a successful mortgage comparison service could win a lot of new customers.

The share price has fallen by 14% since I last covered this business in July. The stock now trades on a 2018 forecast P/E of 16.8, with a prospective yield of 3.8%.

I think this looks too cheap for such a profitable business, so I’ve added the shares to my buy list.

High-performance engineering

Another company that’s impressed me with its long-term vision is engineering and consultancy group Ricardo (LSE: RCDO).

This one is probably best known for its work on high-performance cars, which includes building engines and transmissions for the likes of McLaren and Bugatti. The group is also involved in racing championships including Formula One and the leading electric car series, Formula E.

Indeed, electric cars are a key area of focus for the firm, which sold two of its conventional engine testing plants last year in order to focus more heavily on electrification.

Alongside this automotive work, Ricardo does some defence work and is involved in environmental consultancy, in areas such as waste management and pollution control.

Profit from specialist skills

The group’s performance last year suggests that customers are happy with its services. Revenue rose by 8% to £380m during the 12 months to 30 June, while underlying pre-tax profit was 2% higher, at £39m.

Order intake rose strongly and Ricardo ended the year with a record order book of £288m, £40m higher than one year earlier. Shareholders were rewarded with a 6% increase in the dividend, taking the total payout to 20.5p per share.

Why I’d buy

Today’s figures tell me that this business generated an operating margin of 8.1% and a return on capital employed of 13% last year. These figures look respectable to me. Although they’re lower than for Moneysupermarket, that’s to be expected given that this business requires factories and research facilities.

Looking ahead, analysts expect earnings to rise by about 5% in 2018/19. This puts the stock on a forecast price/earnings ratio of about 14, with a prospective yield of 2.5%.

In my view, this is the kind of specialist engineering business that could keep growing for many years yet. That’s why I’d be happy to buy these shares today and forget about them for 10 years.

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The occasion was a trading update ahead of results due on 13 September, and markets were clearly disappointed by predictions that underlying pre-tax profit for the full year looks set to come in towards the lower end of analysts’ forecasts. 

The company put it down mainly to weaker automotive performance due to a lower level of UK orders in the second half, along with “some difficult projects which were delivered in the year.“

Group revenue did rise, from £352m last year to more than £380m, but the year ahead looks threatened by the uncertainty surrounding Brexit. The firm expects revenue growth of 3%-5%, but says that’s “assuming that UK market conditions remain as they are today.“

Time to sell?

Should we bail out of Ricardo shares? I don’t think so, and I still see the company as an attractive long-term investment with both growth and dividend prospects. Ricardo has been growing earnings steadily for years — by 44% over the past three years in fact, which is a great performance.

While that’s set to slow, even single-figure annual growth in the coming few years would still look good to me. And along with that growth, we’ve been seeing progressive dividend rises well ahead of inflation. Yields have been relatively low at around 2.5%, but they’re very well covered and a progressive dividend is key to my idea of a good retirement investment.

And even after the earnings growth of the past few years, we’re still looking at P/E multiples of only around 15. For a company with modest debt of around £26m, that looks good value to me.

Insurance cash

I’ve always been a fan of insurance companies, though they have to be viewed as long-term investments and you need to be able to switch off from the short-term volatility that afflicts the industry.

On that thought, I’m seeing the bearish sentiment towards Esure Group (LSE: ESUR) of the past 12 months, which has led to a 35% share price slump, is overdone. The price was perhaps getting a little overheated in summer last year, and folk presumably saw the firm’s early rapid rise and what looked like increasing dominance of the motor insurance market coming to an end.

But I think that was inevitable, as it’s not the hardest of markets for competitors to get into. But now, I see Esure shares as being attractively undervalued.

Premiums up

The company saw its gross written premiums grow by 25% last year, and the first quarter of 2018 brought an 18% rise over the same period last year. There have been some exceptional weather costs, but the firm reckons it’s “well placed to deliver profitable growth in 2018.“

Liquidity looks fine with solvency coverage at December 2017 of 155%.

For me, the real attraction is Esure’s dividends and a low share price valuation that makes the whole thing looks like a tasty package. Yields are expected to provide 6.9% this year and 7.7% next, with decent cover by earnings of around 1.5 times.

And with forward P/E multiples of 10 and nine for this year and next, I see share price growth potential too.

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Analysts are expecting big things from the enlarged group this year and it seems that the firm is on track to meet these expectations looking at the trading update issued this morning.

Strong trading

Trading was “strong” for heritage Aveva, thanks to the improving oil and gas market outlook, which resulted in revenue expanding during the second half of last year.

Overall for the year, revenue increased at a “comfortable” double-digit rate on a currency neutral basis, with growth at 5.9% for the first half. Meanwhile, the update notes the heritage Schneider business also did well, recording low single-digit revenue growth on a currency neutral basis.

For the full-year, analysts are expecting the company to report earnings per share growth of 19.6%, although growth is expected to slow to just 4% year-on-year for 2019.

Looking at these figures, it’s difficult for me to get excited about Aveva and the company’s prospects. Indeed, even though the stock has outperformed the FTSE 100 by 7% over the past month, I’m finding it difficult to see how these gains can continue. The shares currently trade a forward P/E of 28, which looks expensive even when you factor in the earnings growth predicted for the next two years. And the firm is about a fifth more costly than the broader UK IT sector. A dividend yield of 1.8% also leaves a lot to be desired.

With this being the case, I would avoid Aveva. On the other hand, I believe specialist engineering consultancy group Ricardo (LSE: RCDO) could be an excellent buy for your portfolio.

Growing backlog 

Like Aveva, shares in Ricardo have smashed the FTSE 100 over the past few months returning 10% year-to-date, compared to -5% for the UK’s blue-chip index. But unlike Aveva, the stock is much more attractive on a valuation basis. The shares currently trade at a forward P/E of 15.7, and earnings per share are expected to rise by more than 25% over the next two years.

And as my Foolish colleague Ian Pierce recently pointed out, Ricardo’s international diversification across different sectors should help the firm continue to grow no matter what the economic environment. Within its half-year report, the company reported order book growth of 24% year-on-year to £302m against revenue for the half of £183m. Long term contracts guaranteed income for many years and make it more likely that the group will be able to book recurring revenue from customers in the years ahead.

As well as organic expansion in sectors such as rail, defence and energy, the company is also using its strong balance sheet to buy up growth via bolt-on acquisitions. There’s plenty of capacity for further deals with net gearing of only 19.2% and a cash balance of £34m. 

All of these positive factors lead me to conclude that Ricardo is a much better buy than Aveva.

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The founder knows best

The first I’ve got my eye on is AB Dynamics (LSE: ABDP). The £171m market-cap firm is the leading global designer and manufacturer of testing equipment for the industry. It works with each of the top 25 car makers, their suppliers and government bodies that oversee them.

The firm designs equipment that covers everything from testing the mechanical systems of a car to high-tech robot drivers and software that tests how well driver assistance systems function.

Thanks to this ever-expanding range of testing equipment on offer, deepening relationships with long-term customers in Europe, and a concerted sales push into massive new markets like China, AB Dynamic’s revenue is growing rapidly. In the year to August 2017, sales were up 20% to £24.6m while an increased focus on high-tech, high-margin equipment pushed adjusted operating profits up 26.2% to £5.9m.

Over the long term, the company appears well placed to take advantage of increased levels of vehicle ownership in emerging markets, the rising technicality of traditional cars, and the intense competition between car makers and tech firms to design driverless and electric vehicles.

And management is investing to meet rising demand for its services with a brand new £8.4m design and manufacturing facility completed at its headquarters and continued high levels of reinvestment in internal R&D teams. But management isn’t betting the farm as its net cash position of £9.6m provides a very nice rainy day fund for when the auto industry inevitably experiences its next downturn.

AB Dynamic’s shares aren’t cheap at 25 times forward earnings, but I believe its founder-led board has built a sector-beating company that will reward investors for many, many years to come.

When in doubt, call a consultant 

Another auto-related stock on my radar is consultancy Ricardo (LSE: RCDO). It provides services to a wide range of industries, but in 2017 saw 56% of its orders come from its automotive and high performance vehicles segments.

And with these segments attracting a bevy of new contracts from global auto manufacturers, Ricardo is booming. Half-year results released this morning saw revenue growth accelerating by 9% to £182.6m. The group’s order book also grew 24% to £302m, which bodes well for the medium term as it includes plenty of multi-year contracts.

Although Ricardo isn’t as profitable as AB Dynamics, with underlying operating margins for the period coming in at 9.5%, the group does have the benefit of being more diversified with major customers in the rail, energy and defence sectors. This trend should only continue as management uses acquisitions to expand into new sectors related to its core engineering expertise.

With its shares sanely priced at 16 times forward earnings, a well-covered 2% dividend yield, sustainable net debt of only £31.5m and a bulging order book, I think now could be a great time to pick up a long-term winner at an attractive point.

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With that in mind, here’s one stock which seems to be overvalued and could be worth selling in order to buy oil producer Premier Oil (LSE: PMO).

Improving outlook

The seemingly overvalued company in question is global engineering and strategic, technical and environment consultancy business, Ricardo (LSE: RCDO). It reported impressive first half results on Wednesday which showed an order intake of £235m. This is £50m higher than in the same period of last year and represents an organic growth rate of over 25%. It was generated from a broad mix of sectors, including the development of electric vehicle battery systems from a customer in China.

The company’s order book has increased to a record high and was in excess of £290m at the end of December 2017. This compares to an order book of £244m at the same time last year. With net debt falling from £38m to £32m in the last six months, the company’s financial standing appears to be strong.

Looking ahead, Ricardo is expected to report a rise in its bottom line of 7% in the current year, followed by 5% next year. While it’s performing well and has a bright future, its valuation suggests that it may offer limited upside potential. Its shares have surged 480% higher in the last nine years and now trade on a price-to-earnings growth (PEG) ratio of 2.7. This indicates that now could be the right time to sell, rather than buy, the stock.

Growth potential

Of course, not all stocks are overvalued at the present time. As mentioned, Premier Oil continues to offer growth at a reasonable price. Certainly, the company is relatively high risk and lacks the size and scale of many of its sector peers. However, with a rising oil price acting as a tailwind, the business is expected to return to profitability in the current year. This is set to be followed by a rise in earnings of 41% next year, which could cause investor sentiment in the stock to improve.

Despite its upbeat financial outlook, Premier Oil continues to trade on a relatively low valuation. For example, it has a forecast price-to-earnings (P/E) ratio of around 6.5, which is expected to drop to just 4.5 next year, if its forecasts are met. This suggests that there is a wide margin of safety on offer, and this could make the stock’s risk/reward ratio highly favourable for the long run.

With the company having cut costs and restructured its business in the wake of the lower oil price, it now seems to be ready to deliver improving share price performance.

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Uniquely positioned

The group based in Shoreham-by-Sea, West Sussex, works across a range of market sectors including passenger cars, commercial vehicles, rail, defence, motorsport, energy, and environment, with a client list that includes transport operators, manufacturers, energy companies, financial institutions, and government agencies.

Ricardo’s in-house engineering capabilities enable it to design and deliver high-quality prototypes and low-volume manufacturing of complex products and assemblies, including engines, transmissions, electric motors and generators, battery packs, and fuel cell systems.

Record order book

The company is uniquely positioned to handle the toughest strategic and operational challenges, with assignments that have included strategy development, cost reduction, safety management, regulatory compliance and environmental impact assessments.

Preliminary results for the full year ended 30 June revealed a 6% rise in total group revenues to £352.1m, compared to £332.4m the previous year, with underlying pre-tax profits in line with expectations at £38.3m. The financial year ended with another record closing order book at £248m, a 7% increase on the previous year.

Aston Martin

It was a particularly good year for the group’s Rail and Environmental consultancies, as well as its Performance Products business, which delivered its 10,000th engine to McLaren, and was selected to design and produce an advanced hypercar transmission for Aston Martin.

Ricardo’s shares have pulled back sharply since last year’s all-time highs, and now offer much better value trading at just 13 times earnings for the current fiscal year to June 2018.

Luxury car market

Carclo (LSE: CAR) is another specialist small-cap firm that’s no stranger to the luxury car market. I last looked at the technical plastic products supplier back in April when I rated the shares a buy. But after a mixed trading update, am I still bullish on the West Yorkshire business?

In its most recent update, Carclo revealed that overall trading for the current financial year to March 2018 remains in line with expectations, with strong trading at its LED Technologies division which provides lighting for top of the range luxury cars such as Aston Martin, Lamborghini and McLaren.

Technology-led

But the Technical Plastics division had a challenging start to the financial year with new programmes being delayed and some operational challenges, which have now been largely resolved. Performance is now much improved and should be considerably better in the second half.

Carclo’s share price has pulled back sharply since peaking in June, and I believe this presents investors with another opportunity to stake a claim in this exciting technology-led business. Trading on a forward P/E rating of less than 11, I think the shares are simply too cheap for bargain hunters to ignore.

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