How I’d invest £10k for big growth in 2020

2020 is going to be choppy. But aim high with these growth shares and you could come out smiling, says Tom Rodgers.

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Outside the slow-growing, slow-moving FTSE 100 giants there are a few gems with high levels of free cash flow, low debt and great management that I believe will outperform the market in the next 12 months and beyond. But how to find them?

Newer investors can put too much emphasis on price-to-earnings ratios: some will see a P/E ratio higher than 15 or 20, and instantly disregard it. But higher P/E ratios don’t immediately make a share a bad investment.

It could be that the shares are expected to grow very quickly and so it’s worth paying a higher price for the promise of even better future earnings. Consider digital fashion star Boohoo, for example. Its P/E ratio has been in the range of 60-75 this year, and it keeps on beating expectations and surpassing earnings records.

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Read on and you could make yourself richer in 2020.

Gaming the system

The Team 17 (LSE:TM17) share price has risen steadily over the last 12 months and I think there’s much further it can go.

A trailing P/E ratio of 42 may put investors off. But I say you’d be missing out.

H1 2019 results saw revenues up 97% to £30.4m, gross profits 119% higher at £15.1m, adjusted earnings per share up 356% and margins up 5% to 49.8%.

Created with Highcharts 11.4.3Everplay Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

CEO Debbie Bestwick is a well-regarded industry pioneer and leads the £442m market cap Wakefield-based indie game developer and publisher, which is probably best known for the multi-million selling 1995 console classic Worms.

After releasing 16 different variations of the game, in 2010 Team 17 restructured away from a single IP company to branch out into mobile and next-gen gaming.

New title Yoku’s Island Express won a BAFTA for best game debut in May this year. Profit and earnings announcements keep on getting better, and results for the year ending 31 December should beat expectations again, driven by “continued sales momentum” across its portfolio and boosted by “strong customer traction,” the board has said.

Net cash is at £35.8m and Team 17 is debt-free, too. The share price is up 35% in the last year, but has dipped 5% in the past month, so I’d say now is your best chance to buy-in relatively cheaply.

Bouncing back

Avon Rubber (LSE:AVON) is another company that doesn’t tend to make splashy headlines, instead focusing on making a mint for its shareholders. The share price is up 135% in the last five years, and revenues keep climbing year over year.

Created with Highcharts 11.4.3Avon Technologies Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Buying 3M’s ballistic protection business for £75m in August was a sound move. CEO Paul MacDonald said his firm, which makes protection gear for military, fire and law enforcement, now has a “very attractive opportunity” to take advantage of existing body armour contracts with the likes of the US Department of Defense.

The board’s progressive dividend policy is important for the future: it expects to grow its dividends ahead of earnings for a dividend cover of two times earnings per share. Any dividend cover over 1.5 is generally regarded as solid. Meanwhile, cover of less than 1 means dividends are unaffordable and are more likely to be cut.

The future is bright for Avon, as demand for its products continues to grow, which means more profit for the firm, and more growth for shareholders.

If you focus on earnings and future potential, instead of doggedly sticking to P/E ratios, 2020 truly could be a bumper year all round, I believe.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Tom owns shares in Team 17. The Motley Fool UK has recommended Avon Rubber. 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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