6 key stocks for growth investors

There were some excellent growth stories on the FTSE's AIM over 2016, with the index rising 30% and many of its constituents enjoying incredible runs. With the new year well underway, and finals/trading updates starting to trickle out, we look at 6 of the top AIM growth stocks for the year ahead, from the big players to the new kids on the block.

To confirm: I do NOT hold positions in any of the stocks that are mentioned in this article. 

Blue Prism

(LON: PRSM)

Blue Prism is a Saas-based Robotic automation software specialist, that works with a range of high-profile companies, including the NHS, O2, and the Coop. Like G4M, its share price has also seen tremendous growth in the past year, increasing a whopping 340% since it listed last March. 

PRSM grew 60% from FY15-16 and is forecasting £14m for FY17, but losses also increased during this period due to the immediate expensing of sales commissions for long-term contracts. Good news is that PRSM is expanding into the US and has plenty of cash to cope with losses over the next two or three years.

Purplebricks

(LON: PURP)

** at the time of writing, Purplebricks shares were trading at 220p. They have since increased to 320p

The creatively named Purplebricks is an online platform attempting to disrupt the Estate Agency establishment. It's gained increasing attention in the AIM world over the past year due to its enormous growth potential, hefty valuation, and significant marketing spends.

PURP's aim is to challenge the existing Estate Agency revenue model, by charging an upfront fee without guarantee of a sale, dramatically undercutting the post-sale commission model that has long been used by most full-service estate agents.

It has seen considerable success in the UK in the past few years and has recently expanded into Australia. The latest development came last week with a £50m raise to go after the massive US market. 

However, investors should keep a close eye on the competition, as PURP's business model is replicable and competitors like eMoov.com and housesimple.com have recently raised capital to compete. Also, established agencies could pivot to match PURP's offering, but with far greater overheads, it seems unlikely to be a threat, and the online competition is a long way behind.

PURP's valuation might look steep for prospective buyers, but it has deep pockets, first mover advantage (PURP is miles ahead of its peers regarding web traffic, and they would require significant capital to change that), and it has considerable backing from the City!

Shares are up 204% over the last three months, and recent volumes imply heavy institutional buying post the US announcement.

Gear 4 Music Holdings

(LON: G4M)

Gear4Music holdings is an exciting, Yorkshire-based, niche online retailer of musical instruments whose share price has soared 400% in the past year. Its business model is highly scalable and is supported by regional distribution centres and a sophisticated digital marketing operation. 

It's growing well in the UK and has recently expanded into the much larger European market. Another source of growth is its increasing range of higher margin own-brand instruments, providing the firm with the ability to move customers from lower margin branded goods to their products. This is good news as its current margins are relatively small for an online retailer.

Revenues are set to double between 2016 and 2018, from £35m to £79m, with PBT increasing significantly too. Despite its rocketing share price, its market cap is only £134m, and if EPS growth can continue to at c.25% a year - there could be significant upside still on offer.

Boohoo

(LON: BOO)

I couldn't write a post about impressive AIM growth stocks without mentioning the hugely popular Manchester-based fast fashion retailer Boohoo.com. When people say they are looking for the next Asos, Boohoo is as close as it gets. The fundamental difference between the two is that Boohoo sells its own-brand clothes, which are cheaper and more profitable.

After a disappointing first year on AIM (it lost 70% of its value), its share price shot back up in 2016, growing 547% as the retailer raised guidance several times. 

BOO is already forecasting significant revenue growth in the next two years, but with experienced management and an excellent track record so far, investors will be expecting this as a minimum. Growth opportunities here include the lucrative US market, with the firm's recent acquisition of Nasty Gal a step in the right direction. 

Blancco 

(LON: BLTG)

Blancco is a US-based data security and erasure specialist that is listed in the UK. BLTG has been around for a few years now and has been growing nicely (It's 7x the size of its nearest competitor!), but thanks to some long-awaited regulatory changes coming into effect in 2018, the sector could be in for a substantial period of growth.

Blancco has grown revenues by 50% in each of the last two years. 2016 revenues look likely to be around £23m, 50% up on 2015. Brokers are estimating significant future growth for this small cap. Its shares have been on a bit of a run lately, up to a modest 50% in the past three months!

Fevertree Drinks

(LON: FEVR)

Last, but certainly not least, is the premium tonic water manufacturer FeverTree. FEVR has made significant gains since its IPO in November 2014, gaining 70% in its first six months alone. It went on to achieve 200% in its first full year and 165% in its second - a sensational buy for any investors who spotted it early. Those on board from day one would have enjoyed a huge 726% share price gain.

But looking at the financials, FEVR has certainly earned its reputation as a high growth stock, increasing revenues 4-fold between 2013 and 2016, as you can see below, with profits jumping up rapidly, too. EPS grew 303% last year and is forecast to jump 108% this year.

The business model is very scalable, with production outsourced, and it recently needed to increase its orders from suppliers to meet demand.

Regarding valuation, it might seem steep for those looking purely for growth, its P/E ratio (currently 58x forward earnings) is baking in a lot of expectation. Compared with its competitors, FEVR is trading at a huge premium:

We agree with broker Whitman Howard, who recently argued that the P/E "gulf" between FEVR and its soft drinks peers is justified due to the company's ability to drive the mixers category, and expand into the US market which is "5 to 6 times larger than in the UK". 

Keep an eye on FEVR this year, because if the company can beat earnings again like it did "materially" in January, this stock's momentum could see it go further.

At Research Tree, we have four key screens to help users find equity research on the top UK-listed growth stocks. We use various filters to help private investors quickly find great stocks that they might not have known about.

 

GARP - Growth at a reasonable price

Latest FY revenue growth greater than 5%

Current P/E less than 18x

Current Free Cash Flow Yield greater than 5%

Latest full year EPS growth greater than 10%

 

Growth Shares

Latest full year revenue growth greater than 10%

Latest 5-year average EPS growth greater than 10%

Latest growth in full year FCF/shr greater than 10%

Quality Growth Shares

Latest full year revenue growth greater than 10%

Latest full year EPS growth greater than 10%

Latest Return on Invested Capital greater than 18%

The Next Asos

Current market cap less than £1bn

Latest forecast 12 month EV / Sales less than 2x

Latest full year revenue growth greater than 15%

Latest full year EPS growth greater than 15%