Buying shares in small companies with excellent potential can be an incredibly rewarding long-term strategy. Holding these kind of shares in an ISA would be even better, since any capital gains or income won’t be taxed.
With this in mind, let’s look at three hot growth stocks and ask whether you should make room for them in your portfolio.
Purple patch
Online estate agent Purplebricks (LSE: PURP) announced its first set of annual results this morning. Group revenues were up 448% (£18.6m) and gross profits rose by a 427%. The company sold £2.8bn of property in the last 12 months and visits to its website grew to 1.23m by April from 0.4m the previous year.
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Much of Purplebricks’s appeal lies in its disruptive business model. In contrast to traditional agents charging a percentage of a property’s sale value, sellers pay a fixed fee for all marketing and administration. Instead of having its own agents, the company offers a flexible service using Local Property Experts (LPEs) who are able to work any day of the week and in the evenings. LPE recruitment is now ahead of plan and increased by 159% over the past year.
Although more established players are starting to adapt, Purplebricks is arguably streets ahead and is now looking to launch in Australia. Unsurprisingly, this advantage (and the potential for massive returns) is factored into the company’s vertigo-inducing valuation. It could be argued that there is far more chance of it disappointing shareholders and the market than succeeding. Then again, wasn’t the same thing said about ASOS and ARM Holdings?
Time to get serious?
Despite the odd bit of director dealing and updates about preferred contractors, fertilizer-producer, Sirius Minerals (LSE: SXX) hasn’t provided the market with much to feed on since the publication of the report from its definitive feasibility study in March.
This situation could change dramatically with confirmation that its harbour facilities have been approved and an announcement relating to the funding of the actual mine. Investors will be focusing on the AGM on June 24 (yes, the day after the EU referendum vote) and hoping for news from CEO, Chris Fraser.
Although a lot of work is clearly going on behind closed doors and the investment case has looked more positive in recent months, let’s be clear — this is no ‘safe’ and dependable FTSE 100 stock (for now). Even just the suggestion that the board is struggling to raise funding for the mine could see the shares plummet.
As a current shareholder with retirement a few decades away, I’m willing to endure the roller-coaster ride ahead. However, Sirius forms only a small part of my diversified ISA portfolio — and for good reason.
Giving investors cheer
Before this week, boohoo.com (LSE: BOO) had been making its investors very happy indeed. A strong and sustained rise in the share price was further boosted by last week’s trading update. Revenue has jumped by 41% and overall gross margin is up 56%. The company now has 4.2 million active customers, a 30% increase on last year and expects sales growth of 25-30% for the financial year. The £61m cash on its balance sheet is also encouraging.
Nevertheless, over the past few days, the shares have been highly volatile, perhaps as a result of some profit-taking and pre-referendum nerves. Like Purplebricks, boohoo carries a steep valuation — it has a forecast price-to-earnings (P/E) ratio of 37 — so prospective investors will need to think hard about whether current performance can be sustained.
