The UK’s top 2 growth stocks are set to outperform once again in 2017

Should you buy these growth stocks ahead of further gains next year?

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Top growth stocks are a rare breed and finding these stocks before they explode into the mainstream is even harder. Most stocks touted as the next hot growth play end up on the scrapheap, but that’s not the case with Boohoo.Com (LSE: BOO) and Just Eat (LSE: JE). Indeed, this year shares in these two high-growth large caps have significantly outperformed the wider FTSE 100. 

Year-to-date shares in Just Eat are up by 16%, outpacing the wider FTSE 100 by 5.4%. Meanwhile, shares in Boohoo have gained 227% so far this year, eclipsing the FTSE 100’s gain of 10.6% excluding dividends.

The big question is whether or not these companies will continue to outperform over the next 12 months?

Further gains ahead? 

It’s rare for a stock to see gains of 100% plus for a year or more. Even the world’s fastest-growing tech companies have struggled to maintain this kind of growth. And with Boohoo I don’t expect the story to be any different. 

While I can’t deny that the company’s growth has been nothing short of outstanding, it now looks as if the company’s shares have got ahead of the fundamentals. For the year ending 28 February 2017, earnings per share growth of 56% is expected. But despite this rapid expansion the shares look expensive trading at a PEG ratio of 1.3 (a PEG ratio of less than one indicates growth at a reasonable price). 

The reason why Boohoo’s shares look so expensive at current levels is the fact that they trade at a forward earnings multiple of 71.3. What’s more, based on current forecasts the company isn’t expected to grow into its premium valuation any time soon. The City has pencilled-in earnings per share growth of 25% for the year ending 28 February 2018. On this basis, the group is trading at a 2018 P/E of 56.1 and PEG ratio of 2.3. 

Still, Boohoo has surprised in the past so even though the shares look expensive right now, the company may have another trick up its sleeve.

Attractively priced growth 

After recent gains shares in Just Eat trade at a high forward earnings multiple. However, unlike Boohoo compared to the company’s projected growth rate, the shares look to offer growth at a reasonable price. Specifically, right now shares in Just Eat are trading at a forward P/E of 51.5, but earnings per share growth of 71% is expected for this year indicating that the shares trade at a PEG ratio of 0.7. Further, earnings per share growth of 51% is expected next year for a P/E ratio of 34.2 and a PEG ratio of 0.7.

The bottom line 

So overall, after recent gains, it looks as if shares in Boohoo are overvalued and are unlikely to go on to repeat 2016’s gains next year. On the other hand, shares in Just Eat look as if they have further to run, based on the company’s modest valuation and explosive growth rate.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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