The best time to buy growth stocks is before the rest of the market realises their potential. Today I’m looking at two such stocks that I believe are just getting started, and could generate tremendous returns for investors in the years ahead.
Contrarian play
While the rest of the restaurant market is struggling, Fulham Shore (LSE: FUL), owner of the Franco Manca and The Real Greek brands, is powering ahead.
Considering the state of the rest of the restaurant industry, I wouldn’t blame you for wanting to stay away from Fulham Shore. However, the firm seems to be firing on all cylinders. The shares jumped 10% in early deals this morning following a pre-AGM trading statement which states: “There have been encouraging revenue increases in both Franco Manca and The Real Greek in the first 21 weeks of the financial year.“
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The trading update goes on to note that revenue has been rising thanks to “a slightly greater number of transactions” driven by “menu innovation, the quality of food, the value of our propositions and dedication of our team.” It speaks volumes about the company’s offering to customers that Fulham Shore is managing to grow at a time when the rest of the casual dining sector is struggling.
The question is, can the company keep this up? I believe it can. Unlike other operators, Fulham Shore is not rushing to expand. There has only been one net addition to the group’s restaurant portfolio so far in fiscal 2019. And while management is in “the final stages of negotiations” for several new locations, the development of these will be funded “largely through internally generated cash flow.“
Unsustainable debt burdens are one of the primary reasons why restaurants go out of business. It’s refreshing to see that Fulham Shore doesn’t want to make the same mistake.
City analysts have the company reporting EPS of 0.7p for 2018, on a net profit of £3.1m. Revenue is expected to grow 29% year-on-year. Based on these figures, the stock trades at a forward P/E of 16.2 which, in my mind, is a price worth paying for such a fast-growing enterprise.
Undervalued tech play
I’m equally bullish on project management software business, Elecosoft (LSE: ELCO).
After several years of consolidation, City analysts have the company reporting earnings per share growth of 33% for 2018. Personally, I believe there’s a chance the firm could beat this number. In a trading update for the six months to 30 June, published the beginning of this month, management told investors unaudited profit before tax was up 45% year-on-year.
Looking at these numbers, it’s no surprise to me that the stock is trading at a forward earnings multiple of 21. In my mind, this valuation undervalues the business’s potential. Analysts have earnings growing by another 20% in 2019, and that’s before the impact of any acquisitions.
In July, the company acquired Shire Systems for £6.3m to boost its stable of products. And with a net cash balance of £2.3m, I wouldn’t rule out further deals in the months ahead.
Put simply, I reckon it could be time to snap up this hidden gem before the rest of the market catches on.
