You can make a fortune investing in growth stocks. For example, Fevertree Drinks, one of the market’s top growth stocks, has returned 2,087% since its IPO in 2014, turning every £1.60 invested into £35.64. Meanwhile, Dart Group has turned every £1,000 invested into £81,000 over the past decade.
However, while some growth stocks have made their investors rich, others have struggled lately. Here are the three worst growth stocks of 2018 so far.
Rising costs
Growth star Asos (LSE: ASC) has fallen from grace this year as investors have baulked at the group’s escalating capex spending.
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Even though the company announced a 27% increase in sales for the six months ending in February, the firm is having to spend more to keep its edge over competitors. For the next two years, Asos is planning to spend £230m-£250m on logistics and distribution facilities, up from initial guidance of £200m-£220m.
Compared to current City forecasts for net profit of £81m for fiscal 2018, this figure is significant. With shares in Asos trading at 52 times forward earnings, management can’t afford to disappoint investors.
Unfortunately, it looks as if this is what it has done. After rising 13% during the first quarter of 2018, it slumped following results. The stock is now down 13% for the year, a decline of 26% from the peak.
To rebuild investor confidence, Asos needs to prove that it remains ahead of the competition, and the only way to show this is with profit growth. But I believe there could be further declines ahead.
Bust IPO
Last year, Alfa Financial Software (LSE: ALFA) made a splash as the biggest IPO in London. The company has not lived up to the hype. Year-to-date the stock has cratered 70%.
Earlier this year, the company issued a profit warning announcing that a major customer had paused its implementation of Alfa’s software, following data migration issues. As well as this headwind, the group also warned that contract completions with two other companies were taking longer than expected.
As a result, City analysts believe the group will miss revenue expectations for the year by around £20m, which is a big deal. Analysts have slashed EPS expectations for the year from 11.4p to 5.5p. Even at this lower level, the stock looks expensive, trading at 26 times forward earnings.
I like to avoid companies where the loss of just one client can make or break a year of performance and Alfa is no different. In my view, the risk here far outweighs the reward.
Failed acquisition
In 2017, Animalcare Group (LSE: ANCR) completed what management initially described as a transformative acquisition with Belgian veterinary business Ecuphar.
The deal has been transformative, but not in the way management or shareholders might have hoped. Integration is proving tricky. Full-year results for 2017 showed a decline in EBITDA margins from 13% to 11% as difficult trading conditions forced the enlarged enterprise to slash prices. Cash profit fell 9%.
Investors have lost trust in the highly-rated company. The shares are down 50% year-to-date and nearly 60% since the merger. The valuation has fallen from a forward P/E of 31 in September 2017 to just 11.7 today. The one good thing about the decline is the stock now looks cheap, but I would wait for further evidence that the business is back on track before buying.
