Are these the worst ‘growth’ stocks on the market?

There’s barnstorming revenue rises on show at these growth champions, but shareholder returns could head in the opposite direction says One Fool.

| 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.

Take the profitable pizza brand Domino’s, replicate it abroad, invest heavily in a rapid rollout and then rake in the profit. Many investors were attracted by the investment thesis behind DP Poland (LSE: DPP) when it listed on AIM back in 2010, and who can blame them? After all, the UK-based Domino’s Pizza Group has smashed the market by delivering wonderful growth, cash-flows and 20% operating margins for years now.     

I was tempted too but I’m glad I never bought shares because the £63m small-cap has failed to even hit break-even, let alone replicate the outstanding results of its UK namesake. 

The company opened 13 stores in the first half of this year for a total of 48. Revenues jumped 49% over the period to £4.4m, yet this meteoric rise somehow had a negative effect on the bottom line: the company recorded a growing loss of £1.1m. 

Should you invest £1,000 in Yougov Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Yougov Plc made the list?

See the 6 stocks

At least the balance sheet is solid with £8.8m in cash and negligible debt. Of course, this has not been generated by operations but by a number of placings over the last few years to maintain this unprofitable rollout. I would not be surprised to see the company return to shareholders cap-in-hand again in a few years. 

Like-for-like sales were strong and have grown for 19 consecutive quarters, so perhaps one day the chain will thrive. Until I see the positive growth narrative reflected in the figures, however, I’ll be avoiding the shares. 

Beware honeyed ‘highlights’ figures 

Investors beware – highlights or adjusted figures can be very misleading. Take YouGov’s (LSE: YOU) FY17 highlights. The company reported an adjusted operating profit of £14.5m on revenues of £107m for 10.9p EPS. If we took these figures as gospel then the company trades at a P/E of 28 which would not seem unreasonable for a firm that grew revenues by 21%, all-the-while achieving a 13.6% operating margin.

If we look at the statutory figures, however, otherwise known as the actual financial results of the company, basic earnings per share come in at 4.4p – less than half the figure first presented to investors – and the operating margin is a less enticing 7%. 

The big question then, is whether or not the adjustments made are fair. The most significant adjustment was for the amortisation of intangible assets. Sometimes it is fair to adjust out amortisation, but in this case I believe it is inappropriate and does not paint a clear picture of underlying operations.

You see, the company capitalises plenty of spend each year, often including internal software development costs. This is perfectly in line with accounting practices, and is designed so costs not related to ongoing operations – such as the development of new services – do not get recorded as a cost on the income statement and therefore don’t impact profit immediately.

Usually these costs impact the income statement over time as they are amortised, smoothing out their impact. I’d therefore argue that the company’s adjusted figures shouldn’t exclude amortisation. After all, the company spends cold, hard cash on these capitalised activities practically every year and it should surely be represented somehow in these highlights.

These headline figures don’t take that into account, therefore presenting the business in a rather flattering light, in my opinion. If we value the company on its EPS of 4.4, the P/E is 69 and that, in my book, is a ludicrous price.

Should you buy Yougov Plc now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »