10 growth stocks selling at reasonable prices

A consistently strong performing strategy over a long period, Stockopedia's Ben Hobson names the fast-moving shares that offer a blend of growth, reasonable price and momentum.

Many stockmarket investors are captivated by the stunning returns that can be had from fast growing, attractively priced shares. There have been some stunning returns from this area of the market in recent years. And despite a run up in prices, it's still possible to find stocks with the potential to offer "growth at a reasonable price".

Growth investing has long been the hallmark of some of the best known names in investing. In the US, the likes of Peter Lynch and Philip Fisher made fortunes on the back of the strategy. In the UK, the late Jim Slater and modern day heroes like Robbie Burns have done the same.

But while investing in relatively small, promising, fast growing companies sounds appealing, there are risks. Growth can stall and unexpected setbacks can emerge. In a market where the prices of some growth stocks have risen quickly, it's important to tread carefully.

Fear of sudden reversals is precisely why many growth strategies take valuation seriously. Growth at a reasonable price (GARP) strategies can offer some protection from over-stretched prices. So it's worth exploring some of the features of what a classic GARP stock should typically look like, and the sort of strengths that a pro like Robbie Burns would look for. 

Rapid and reliable earnings growth

A company's historic profitability and the expectation that its earnings will keep growing is an important factor in any growth investing strategy. Likewise, sales growth and even dividend growth can be a pointer to firms that are not only growing, but are confident that they can keep up the pace.

Modest debt is an important element here. Low or no gearing is highly desirable because debt is one of the biggest killers of small firms. As a rule of thumb, someone like Burns would insist that net debt is less than three-times operating profit.

Growth at a reasonable price

Growth and value are occasionally seen as being at two ends of the investing spectrum, but GARP investors see thing differently. That means thinking about how the market is pricing a stock's earnings and profitability outlook. Racy multiples can point to frothy prices, which in turn can be a risk if things go wrong.

So for a growth investor like Burns, a guide would be to use a price-to-earnings ratio of 20 as a yardstick. Anything more needs investigation. Likewise, he's previously used a price-to-pre tax profits ratio limit of 15. Again, the idea is to get a feel for when valuations might be stretched.

Positive price trend

A third component of GARP strategies looks at price momentum. Growth investors are almost always focused on stocks that have already caught the imagination of the market. Negative price trends are a no-no. 

There are various ways of examining momentum. But for Burns, it's essential to see a positive price change over the past year. In addition, the price of a stock needs to be at least five percent higher than its 52-week low. That give scope for finding stocks that may be only just recovering. But combined with the other factors in the GARP strategy, they could be poised to re-rate quickly.

Source: interactive investor   Past performance is not a guide to future performance

Over the past two years, a strategy tracked by Stockopedia that models Robbie Burns' approach has returned 19.2%. But it has been a consistently strong performing strategy over a much longer period and has seen big surge since mid-2016. Here are some of the companies currently passing the rules:

Source: Stockopedia   Past performance is not a guide to future performance

Despite the pressure that has hit equity prices this autumn, these potential GARP stocks are all still showing positive price gains over the past year. Leading the list of small-caps that pass the rules of this Robbie Burns inspired strategy is building group North Midland Construction, home consumer products supplier Norcros and furniture and flooring retailer ScS. Some of the strongest earning growth has been seen in firms like agricultural and fuel supplies business NWF, hire chain Speedy Hire, doorstep lender Morses and recruitment firm Staffline.

Strong growth - but watch the risks

Finding a balance between growth and momentum has got a lot harder during the recent market volatility. But stocks with this profile have proved to be a source of impressive returns in recent years. Investors like Robbie Burns have made their names with strategies that target these kinds of shares.

Growth investing can be risky of course, but the GARP approach can offer some protection. A blend of growth, reasonable price and momentum may well help steer away from danger - and there’s no doubting it’s an appealing strategy that targets what can be the fastest moving companies in the market.

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