Every month, we ask our freelance writer investors to share their top ideas for growth stocks with you — here’s what they said for August!
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FRP Advisory
What it does: FRP helps businesses in economic trouble by providing advice on restructuring, debt and pensions.
By Royston Wild. Finding solid growth stocks to buy is becoming increasing challenging for UK investors. Inflation is soaring and economic growth is stalling, putting corporate profit forecasts under increasing strain.
But FRP Advisory Group (LSE: FRP) is a stock that’s set to benefit from these deteriorating conditions. The business provides a range of advisory services to companies in financial distress, the number of which is soaring in Britain. Higher interest rates mean that businesses are struggling to pay their debts.
According to tax, audit and advisory firm Mazars Accountants, the number of corporate insolvencies has rocketed 70% over the past year, to 19,191. Unfortunately it has warned, too, that “the dismal outlook means more pain for businesses is likely.”
FRP’s share price has slumped more recently. This is because of rising costs that caused profits to fall in its latest financial year (to April 2022).
I consider this to be a great dip buying opportunity and expect FRP’s shares to bounce back as trading activity gathers momentum. Revenues at FRP leapt 21% year-on-year in fiscal 2022, and rose 11% on an organic basis.
Royston Wild does not own shares in FRP Advisory.
Kainos
What it does: Kainos is a technology company that helps public and private organisations with digital transformation.
By Edward Sheldon, CFA. Kainos (LSE: KNOS) shares have experienced a significant pullback this year as growth shares have fallen out of favour and I think this has created a compelling investment opportunity.
Kainos is benefitting as companies and government organisations embrace technology and this is reflected in the group’s financial performance. Last financial year (ended 31 March 2022), revenue was up 29%. Meanwhile, at the end of the period, the group’s contracted backlog was £260m – up 26% year on year.
Looking ahead, I’m confident that Kainos will continue to grow at a healthy rate. That’s because digital transformation can help organisations lower costs and beat inflation. It’s worth noting that CEO Brendan Mooney recently said that demand for the company’s services has “never been higher”.
Now, this growth stock isn’t cheap. Currently, its P/E ratio is in the high 20s. This adds risk to the investment case. However, I believe that long-term investors in the company, like myself, will be rewarded over time.
Edward Sheldon owns shares in Kainos
dotDigital
What it does: dotDigital is a SaaS company providing an omnichannel marketing automation and customer engagement platform.
By Zaven Boyrazian. The technology sector hasn’t had much love in 2022. Yet, despite the volatility, there remain plenty of attractive opportunities for my portfolio. One that’s caught my attention at the moment is dotDigital (LSE:DOTD).
With the tailwinds from the pandemic slowing down, top-line growth followed suit, upsetting quite a few momentum investors. Yet even without these catalysts, revenue continues to expand at a respectable rate. Meanwhile, its latest trading update showed a 16.8% jump in average revenue per customer.
In other words, clients are spending more money on the firm’s marketing platform. And even with an uncertain economic outlook, marketing email volumes are up 22% to 29.4 billion versus a year ago. This all bodes well for the company, especially given its fierce competition from alternative platforms.
Pairing this with a seemingly cheap valuation makes dotDigital look like an excellent growth addition to my portfolio this month.
Zaven Boyrazian owns shares in dotDigital.
Domino’s Pizza
What it does: Domino’s is a UK-based pizza delivery company and FTSE 250 constituent.
By Paul Summers: At the time of writing, shares in Domino’s Pizza (LSE: DOM) are down by over a third in 2022. That’s not entirely surprising. The squeeze on discretionary income was never likely to be good news for the firm.
For a long-term growth investor like me, however, this is looking like an opportunity to acquire the stock at a cheaper-than-usual valuation. A forecast price-to-earnings (P/E) ratio of 14 for the current year is below the 5-year average of 16. There’s also a 3.5% dividend yield to reinvest while I wait.
I’m not expecting a rip-roaring recovery in earnings over the next year or so. Nonetheless, decent interim numbers at the beginning of August coupled with encouraging news on the search for a new CEO could herald a change in market sentiment.
Paul Summers does not own shares in Domino’s Pizza.
Safestore
What it does: Safestore is a leading provider of self-storage facilities in the UK and Continental Europe
By Christopher Ruane. I continue to see value in Safestore (LSE: SAFE). Its shares are down 20% since April, although they are still 7% ahead of where they were this time last year.
In the first half, revenue grew 15% compared to the same period last year, diluted earnings were up 67%, operating cash inflows grew 25% and the dividend also grew 25%.
That is excellent growth – and I expect more of the same in future. Self-storage remains a fairly undeveloped industry in the UK compared to the US, for example. I see lots of space for growth. Safestore’s strong brand and proven operating model could help it capitalise on that. One risk I see is competitors trying to woo customers with low prices, pushing down profit margins across the industry.
But I think Safestore has a great, simple formula in a market with strong long-term growth prospects.
Christopher Ruane owns shares in Safestore.
CMC Markets
What it does: CMC Markets specialises in online trading, providing exposure to a range of different asset classes. It has a global presence.
By Andrew Woods. A glance at the historical earnings data for CMC Markets (LSE:CMCX) immediately indicates rapid growth over the past five years. For the year ended March, between 2018 and 2022, earnings per share (EPS) rose from 17.3p to 24.8p.
By my calculations, this results in a compound annual EPS growth rate of 7.5%. For me, I find this attractive in a growth stock. Over that time period, revenue also grew from £209m to £325m.
It’s quite clear that the firm benefited from increased trading activity during the pandemic. As customers enjoyed greater disposable income and had more time to devote to investing, the business saw its profit surge. What’s more, greater volatility in the stock market enabled the firm to derive more income from price spreads.
However, revenue fell by around £100m between 2021 and 2022, suggesting that customer interest and activity may have declined following the pandemic. Nevertheless, revenue and pre-tax profit are still higher than pre-pandemic figures.
Andrew Woods has no position in CMC Markets.
