3 top growth stocks I’d watch in October

Thinking of investing in these popular growth stocks? Here’s what you need to know.

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ASOS (LSE: ASC), YouGov (LSE: YOU) and WH Smith (LSE: SMWH) have records of strong earnings growth and market-trouncing long-term returns for investors. They’re also all scheduled to release their annual results in October.

Book profits

With so many bricks-and-mortar retailers struggling in recent years, you may be surprised to hear that WH Smith has a superb record of growth over the last decade. It’s increased earnings per share (EPS) at an average annual rate of 13%. A relentless focus on cost savings in its High Street business has mitigated the effects of a challenging trading environment and been more than offset by the growth engine of its Travel business. The latter serves ‘captive’ customers in such places as airports and railway stations.

City analysts are expecting the company to post EPS of 109p and a dividend of 51.7p this year. The shares are trading at 2,050p, as I’m writing, so the price-to-earnings (P/E) ratio is 18.8 and the dividend yield is 2.5%. However, earnings growth has moderated to single-digits in the last couple of years and EPS expectations in the upcoming results represent growth of just 4.3%. In view of the now-tepid EPS growth, the P/E and dividend yield look unattractive to me. As such, WH Smith is a stock I’d be happy to sell and book profits on sooner rather than later.

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One good, one bad

My colleague Ian Pierce has written bullishly about both ASOS and YouGov. I agree with him that one of these stocks is an attractive investment proposition but disagree with him about the other.

YouGov upgraded its expectations for the latest year in July. It said its custom research business had yielded improved margins and its higher-margin data products and services business had achieved excellent growth. Following two years of advances in EPS of a mid-20s percentage, City analysts are now expecting YouGov to post a 36% increase to 14.8p for its latest year and a 2.4p dividend. At a share price of 470p, the P/E is 31.8 and the dividend yield is 0.5%. However, I’ve long been critical of the way the company calculates its adjusted EPS (and City analysts who go along with it). Management routinely excludes — unjustifiably, in my view — myriad costs that elevate adjusted EPS far above statutory EPS. On this view, I calculate the P/E as more like 78 than 31.8. As such, this is another stock I’d happily sell today.

There’s no smoke-and-mirrors about ASOS’s presentation of its EPS. City analysts expect strong growth to continue for the latest year, with a 25% increase to 96.2p. This gives a P/E of 59 at a share price of 5,700p. While the P/E may seem high (and the company currently pays no dividend), the valuation is attractive compared with its own history.

The share price was above 7,700p earlier this year and I believe it could be well-worth buying the stock at the current depressed level, ahead of the upcoming results. I think sentiment has been hit by concern among some analysts about the sustainability of ASOS’s margins and by an increase in short sellers of the stock in recent months. However, I reckon the company’s medium-term growth and margin targets are achievable and I expect the shares to re-rate in due course.

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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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended WH Smith. 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.

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