30 Jan 2 high-growth stocks I’d buy for 2018 and beyond
Befitting its rather dull core business of storing documents in huge warehouses, the recent success of Restore (LSE: RST) seems to have flown under the radar of many retail investors. But because of the necessity of its core business for a variety of professional industries, from accountants to solicitors, Restore has returned nearly 400% to investors over just the past five years.
Judging by the firm’s year-end trading update released this morning, these index-walloping returns could be set to continue for a long time to come. This is because the company continues to build on its market-leading position in document management while also consolidating the fragmented markets for related professional services such as document shredding, IT asset disposal and toner recycling.
The trading update provided no firm figures but disclosed the business was continuing to make good progress and that sales, profits and earnings per share would all be significantly ahead of last year. This is no surprise when considering the company’s H1 results, in which organic growth and acquisitions led to revenue rising 57% to £86.9m and EBITDA increasing 59% to £19.5m.
Looking forward, I wouldn’t be surprised if this level of top line growth slowed significantly in 2018 as Restore’s management focuses on integrating a slew of recent acquisitions and works to lower net debt levels of around 2x EBITDA. But with plenty of scope to improve margins and cash flow, and also plenty of acquisition targets out there in a fragmented industry, I believe now could be an interesting point to begin a stake in Restore at a sane valuation of 22 times forward earnings.
Growth has never tasted so sweet
Another high-growth stock I’ve got my eye on is speciality ingredients manufacturer Treatt (LSE: TET), whose share price has risen 420% over the past decade. This growth has been driven by management repositioning the business as an innovation-led developed of flavours and scents used in everything from tea to soap and haircare products.
And within this overarching category of speciality ingredients, Treatt has benefitted immensely from its expertise in all natural citrus flavours. Sales of these ingredients have been rocketing in recent years as consumers have shifted towards preferring all natural ingredients in their drinks as well as less sugar, another area in which Treatt has expertise.
Management has built the company’s expertise in these areas into a major selling point for winning new contracts with global fast moving consumer goods firms. This is clear in the group’s results for the year to September, with revenue up 24.5% to £109.6m, and operating profits up 44.6% to £13.8m as margins rose significantly.
There’s good reason to believe this level of growth is entirely sustainable as Treatt moves deeper into the massive US market. The group already has a manufacturing facility there but a recent £21.6m fund-raising with institutional investors will provide the capital to expand and modernise facilities in the US and UK to support accelerating sales growth.
Treatt’s impressive record of success, double-digit margin improvements and growth opportunities mean its shares aren’t traditionally cheap at 24.7 times forward earnings. But with plenty of room to further exploit its niche positions, no debt and rising dividends, I think Treatt could continue to richly reward shareholders.
But despite what the lofty valuations of both Restore and Treatt may suggest, not all growth stocks trade at a significant premium to the market. This is certainly true of the Motley Fool’s Top Small Cap, which trades at just seven times earnings even after posting four consecutive years of double-digit earnings growth.
To discover this under-the-radar value and growth investors favourite for yourself, simply follow this link to read your free, no obligation copy of the report.
Ian Pierce has no position in any of the 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.