Is fast-rising Hargreaves Lansdown the best growth stock in the FTSE 100?

After rising over 50% in just the past year, is FTSE 100 (INDEXFTSE: UKX) star Hargreaves Lansdown plc (LON:HL) still a great buy?

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Investors looking for growth stocks are probably accustomed to looking at mid- or small-cap indices like the FTSE 250 or AIM for investment ideas, but the FTSE 100 does have a few stocks delivering terrific growth to their shareholders. One of them is Hargreaves Lansdown (LSE: HL), whose stock price has increased over 55% in the past year.

But with the share dealing platform’s own stock now trading at a lofty 44 times trailing earnings, is it still one of the best growth stocks to own?

Well, from operating margins of 67.6% last year to a doubling of assets under management (AuM) from 2013 to 2017 and adding customers at a rapid clip, there are plenty of statistics that make clear just how impressive a business Hargreaves is.

However, I see a few roadblocks to the sort of growth that the company has delivered to date. The first is that since the company controlled around a third of the market for retail investors as of last September, growth will naturally moderate from here.

This is especially true as competition and regulatory oversight of the industry ramp up. From Vanguard finally offering its platform to UK investors as of last year, to the FCA mulling a ban on exit fees, I see further pressure on the relatively high fees UK share dealing platforms charge their customers.

This is obviously fantastic news for retail investors, but for the likes of Hargreaves Lansdown it will likely mean reassessing its fee structure and potentially cutting charges to maintain market share. For the company itself this does not mean an end to growth, but it does make me view Hargreaves’ lofty valuation as particularly vulnerable to any bad news. For now, I don’t think it is the best growth stock out there at its current valuation, but I’ll keep an eye on it for any share price decline that creates a potentially attractive entry point. 

Consistently impressive 

I’m of a similar opinion about AIM superstar Fevertree Drinks (LSE: FEVR). The upscale mixer maker announced interim results last week that once again blew past already-high investor expectations.

That said, with its stock trading at 75 times forward consensus estimates, there is a lot of growth baked into the company’s share price. This in itself doesn’t worry me too much, since the company’s founder-led management team has continued to grow revenue in its most mature market (the UK) by double-digits period after period.

Indeed, in the first six months of the year, sales in the UK rose 73% to £58m, representing over half of overall group sales. But what gives me pause is that to warrant its current market cap of over £4.2bn, the company cannot rely simply on its home market and will need to prove itself in tougher overseas markets.

Management knows this and has spent the last few months bulking up its North American management team and moving to a direct distribution model to tap the massive American drinks mixer market – which it needs to do big-time to live up to investor hype.

I firmly believe Fevertree can do this, but with the company posting relatively sedate revenue growth of just 14% in America in H1, I’ll need to see some concrete proof before I’d but the company’s shares at their current valuation.

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.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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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