One growth stock I’d buy today with my first £2,000 and one I’d avoid

Roland Head highlights one stock he’d rate highly for a starter portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When you’re in the early stages of building a shares portfolio, it’s often hard to know which stocks to choose. You won’t necessarily have the cash to build a full portfolio immediately.

In my opinion, it’s important to get off to a good start. For me, that means avoiding big losses and hopefully booking some steady profits. The two stocks I’m looking at today both have the potential to deliver handsome profits, but carry very different levels of risk.

Sales up 43% in one year

Shares in online music instrument retailer Gear4music Holdings (LSE: G4M) have risen by 377% over the last two years.

However, progress has stalled over the last year, and the shares slipped lower this morning after the company reported ‘only’ a 43% rise in sales for the year to 28 February. Is this a potential buying opportunity, or a sign that the good news is already in the price?

One potential answer is that the business is starting to mature. Growth has slowed over the last year. UK-specific sales rose by ‘just’ 27% last year, compared to 34% the previous year. And although international sales rose by 69%, this is less than half the 2016/17 figure of 124%.

What about profits?

To some extent, slowing sales are inevitable. Sales are growing from a bigger base, so larger percentages are harder to achieve. But there is a second concern, which is that the group isn’t achieving the kind of profitability investors might be hoping for.

Profits are expected to be broadly flat this year, despite the sales growth of 43%. This means profit margins have fallen. The company says that the main reason for this is investment — Gear4music invested heavily in warehousing and its online platform in 2017.

In today’s statement, chief executive Andrew Wass said that both revenue and profitability should improve in 2018, as last year’s investments pay off. I believe him. But with the shares already trading on 50 times 2018/19 forecast profits, the potential rewards seem outweighed by the risk that the shares could have further to fall. This is too expensive for me at current levels.

Simple and profitable

Homewares firm Portmeirion Group (LSE: PMP) sells ceramics, cookware and table accessories under brands including Royal Worcester, Spode and Wax Lyrical. Not all of these brands are huge in the UK, but they are very popular in North America, which accounts for nearly a quarter of sales.

Indeed, this is a surprisingly profitable business. Sales have risen by an average of 7.5% per year since 2011, while profits have risen by an average of 7% per year.

Return on capital employed — a measure of profitability favoured by long-term investors — is high, at over 15%. This is reflected in strong cash generation and five-year average dividend growth of 10%.

I expect the firm’s growth to continue. And its strong presence in the US market means that I wouldn’t rule out a takeover bid at some point.

You might expect these shares to be expensive. I don’t think they are. Portmeirion trades on a 2018 forecast P/E of 14 with a prospective yield of 3.5%. Given the financial strength of the group’s operations, I think that could prove to be a very good buy.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Portmeirion Group. 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.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »