As ever, investors seem to be rewarding stocks which can offer above-average earnings growth rates. The FTSE 100 has risen significantly in recent months, but companies which are forecast to deliver relatively lacklustre earnings growth have seen their share prices come under a degree of pressure. Therefore, it seems as though buying growth stocks could be a sound strategy through which to obtain high returns.
Although valuations are now higher than they were even a few months ago, there could still be opportunities for long-term growth investors to buy ahead of improving share price performance.
Uncertain outlook?
Reporting on Thursday was international marketing and market research agency System1 (LSE: SYS1). It announced a rise in revenue growth of 27%, with sales up 13% in constant currency. This helped to push gross profit 29% higher, while profit before tax was boosted by 25%.
This was a relatively impressive result in light of the transition the company is experiencing. It has now completed Chapter 1 of its growth outlook, and is well-placed to commence Chapter 2. This will see it build a larger business through challenging the marketing services industry. The company believes it can offer an improved product, as well as marketing that achieves profitable growth.
Following the update, System1’s share price has fallen by around 10%. The reason for this appears to be slower trading than anticipated during the first quarter of the new financial year. However, it remains confident in its outlook for the full year, with growth in earnings of 41% currently forecast by the market. This puts it on a price-to-earnings growth (PEG) ratio of just 0.5, which suggests it could offer high growth at a very reasonable price.
Resilient growth
Following the general election, the reputation of polling companies such as YouGov (LSE: YOU) seems to have been somewhat restored. After polls in the 2015 general election and 2016 EU referendum which were somewhat mixed, the polls for the 2017 general election were much more accurate in general.
Despite the challenges faced by the industry in recent years, market research company YouGov has been able to grow its bottom line at a relatively consistent pace. It has increased earnings in each of the last five years, with its growth rate averaging 13.6% per annum. This shows that it could offer a relatively defensive outlook at a time when the UK economy is facing significant uncertainty thanks to an unpredictable political outlook.
Looking ahead, YouGov is forecast to grow its earnings by 17% in the current year, which puts its shares on a PEG ratio of 1.5. This suggests they are not yet fully valued after growth of 330% in the last five years. In addition, the company is expected to increase dividends per share by 13% per annum over the next two years, which could act as a positive catalyst on its share price. Therefore, buying the stock now could prove to be a shrewd move.
