Every month, we ask our freelance writer investors to share their top ideas for growth stocks with you — here’s what they said for October!
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What it does: ASOS is an online fashion retail firm, comprising 17 different brands. It operates around the globe.
By Andrew Woods. My growth stock pick for October is ASOS (LSE:ASC). For the years ended August, between 2017 and 2021, earnings per share (EPS) rose from 77.2p to 128.9p. Over this period, the company had a compound annual EPS growth rate of 10.8%. I consider that to be consistent and strong.
However, ASOS has been operating in a challenging environment for the retail sector more generally. As the cost-of-living crisis has hit, customers have had less disposable income to spend on clothes. Inflation has also led to shrinking profit margins, as wages and costs increase. The share price reflects these problems, having fallen 82% in the past year.
Despite this, sales improved during the summer and the business expects full-year profits to be within the initial guidance range. Another indication that the company is in decent financial shape is its low levels of debt. This means it’s potentially well placed to work on expansion as we emerge from the pandemic.
Andrew Woods has no position in ASOS.
What it does: Kainos is an IT support services business that helps companies, organisations and governments digitalise operations.
By Zaven Boyrazian. Kainos Group (LSE:KNOS) helps its clients digitalise operations and deploy Human Capital Management solutions through its partnership with Workday. The group serves the public and private sectors, with its most prominent collaboration being with the National Health Service.
Despite record double-digit organic sales growth, the stock has lost nearly a third of its market capitalisation in the last 12 months. It seems the recent drop in profit margins has spooked some investors. And given that the stock trades at a lofty premium of 47 times earnings, this volatility isn’t surprising.
The drop in profitability comes from the steady decline of pandemic tailwinds rather than internal issues. Meanwhile, demand for Kainos’ services continues to grow with a record level of bookings at £349.8m.
While it’s frustrating to see profitability wobble, the underlying business remains uncompromised. And with an impressive amount of potential, I believe the recent downward trajectory presents an attractive buying opportunity, even if the stock still looks expensive.
Zaven Boyrazian does not own shares in Kainos or Workday.
What it does: Halma is a collection of businesses focused on industrial safety, environmental monitoring, and life sciences.
The reason I’ve started investing in this stock is that I think that it’s finally trading at an attractive price. The company has always looked great but expensive to me.
Halma has a straightforward business strategy. It attempts to acquire businesses and use the cash they generate to buy more businesses.
The company also has a decentralised corporate culture. In other words, it leaves individual businesses to get on with what they do well.
Halma’s share price fell below £20 per share recently. At those prices, I think that it’s a terrific buy.
If the stock reaches that price again in October, I’ll be looking to increase my investment significantly. But I think Halma is a great company that I’m happy owning shares in.
Stephen Wright owns shares in Halma.
What it does: Spire Healthcare provides private healthcare services in the UK through 39 hospitals and eight clinics.
Theoretically, Spire’s turnover might suffer as Britons start to feel the pinch. As times get tough, people could be tempted to wait that bit longer for treatment and get it for free on the NHS.
But the size of NHS waiting lists today means that demand for private care continues to rise strongly. At Spire, revenues rose 7% in the six months to June as private revenues jumped almost 22% year on year.
A record 6.8m people were on NHS waiting lists in September. And the Institute for Fiscal Studies thinks the number will get worse before it gets better, possibly even hitting 10.8m people in 2024 before slowly falling.
This explains why City analysts think Spire will report healthy earnings growth over the short-to-medium term. It’s expected to flip from losses of 7.1p per share in 2021 to earnings of 4.4p this year. And in 2023 earnings are tipped to double to 8.8p.
Royston Wild owns shares in Spire Healthcare.
Scottish Mortgage Investment Trust
What it does: Scottish Mortgage Investment Trust is one of the world’s biggest and most famous trust funds. The Baillie Gifford & Co fund invests globally and looks for strong businesses with above-average returns.
By John Choong. While Scottish Mortgage Investment Trust (LSE: SMT) has performed atrociously thus far this year, investors are told to expect a five-year return. As such, the current drop could pave way for a monumental recovery when the global economy eventually recovers.
The trust’s top holdings are mostly growth stocks, with the likes of Moderna and Tesla having plenty of upside to their earnings over the next decade, and could help boost the share price. Additionally, Scottish Mortgage has quite a healthy exposure to China. As the second largest economy in the world reopens from its Covid-19 lockdowns, Chinese equities are seeing steep rebounds, and Scottish Mortgage is expected to benefit from that to some extent.
Either way, with its share price down nearly 50% from its all-time high, this could be an opportune time for me to start a long-term position in a fund with historical success. That being said, investors should be wary that further lockdowns in China could prolong its road to recovery.
John Choong has no position in Scottish Mortgage Investment Trust.
Smithson Investment Trust
What it does: Smithson is a global investment trust run by Fundsmith. It invests in high-quality, small- and mid-cap growth stocks.
By Edward Sheldon, CFA. Smithson’s (LSE: SSON) share price has taken a big hit in 2022 as growth stocks have fallen out of favour and I think this has presented a buying opportunity. Currently, the investment trust is trading at a significant discount to its net asset value (NAV).
I like Smithson’s approach to investing. Like its big brother, Fundsmith Equity, it typically invests in companies that are highly profitable. Meanwhile, it avoids companies that are heavily leveraged, as well as those in industries that are rapidly changing. Names in the portfolio at the end of August included UK property website powerhouse Rightmove, medical technology company Masimo, and cybersecurity specialist Fortinet – all great companies.
It’s worth pointing out that the Smithson portfolio is quite concentrated. So, stock-specific risk is quite high. If a handful of stocks in the portfolio were to underperform, overall performance could be impacted significantly. I’m comfortable with this risk, however. I think Smithson is a good way to get exposure to smaller growth companies listed internationally.
Edward Sheldon has positions in Smithson Investment Trust, Rightmove, and Fundsmith Equity.
What it does: Hargreaves Lansdown is a United Kingdom-based digital wealth management service administering company.
At a time when most people are just trying to pay their energy bills, it was inevitable that revenue at the company would suffer. Combine this with a reduction in new business and assets under administration and the 35% fall, while severe, makes some sense.
Even so, I do think this is shaping up to be an attractive contrarian play. A price-to-earnings (P/E) ratio of 17 isn’t screamingly cheap but it does seem a very enticing price for a company that generates some of the highest margins in the FTSE 100. Moreover, the desire of many to take more control over their finances will surely prove a decent growth driver for years to come.
In the meantime, there’s a 4.7% forecast yield in the offing.
Paul Summers has no position in Hargreaves Lansdown
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The Motley Fool UK has recommended ASOS, Fortinet, Halma, Hargreaves Lansdown, Kainos, Masimo, Rightmove, and Tesla. 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.