Interactive Investor

Bargain hunters told to target these five top growth shares

1st February 2022 13:25

Graeme Evans from interactive investor

Growth-focused stocks set to profit from Covid-induced changes in the way we live are worth sniffing out, reports our City expert.

Growth stocks have endured a torrid start to 2022, but out of this rotation a City firm believes there's an opportunity to pick up high-quality names with favourable long-term trends.

Liberum's top picks are Auto Trader (LSE:AUTO) and former Logica firm Cerillion (LSE:CER), while it also has “buy” recommendations on stocks including Rightmove (LSE:RMV), Frontier Developments (LSE:FDEV) and Trainline (LSE:TRN).

It has lowered some target prices to reflect interest rate expectations, but notes the longer-term benefits for several stocks from changes to consumer behaviour created by Covid-19.

Liberum says: “Before the pandemic we lived in a predominantly centralised world, employees commuted to the office every day, consumers were largely reliant on physical stores, or in-person viewings and entertainment venues. While the shift to digital/online had clearly begun and was more prevalent in certain verticals, the pandemic broadened and accelerated the trend.”

The broker says this has increased the need for infrastructure to support a decentralised workforce and the resources to offer consumers multiple ways to purchase goods and services.

With this in mind, it favours the FTSE 100-listed online portals Auto Trader and Rightmove, based on respective price targets of 825p and 795p compared with 674.8p and 663.8p today.

It notes Rightmove’s continued position as the “must go to site” when it comes to property searches in the UK, while Auto Trader has a similarly dominant market-leading position as the amount of time spent on its site is about seven times that spent on its closest competitors.

Liberum says traditional retailers are increasingly investing in Auto Trader as their de-facto online offering, because the emergence of Cazoo and Cinch has fundamentally shifted the way consumers purchase cars.

The report also backs Trainline to capture the incremental market share that is shifting online.

Shares have fallen to 229.6p from 547p due to government plans for a Great British Railways (GBR) app, but Liberum has a target price of 400p and says it believes the market has over-reacted to the initiative within the Williams-Shapps white paper.

It says: “We struggle to see how the GBR app is going to deliver a superior or comparable user experience to Trainline’s current offering if it chooses to develop one itself.” Liberum believes online penetration in rail will increase to 90%, similar to the airline industry, and that Trainline’s market share of online net ticket sales will increase to 75% in 2024.

On Cerillion, the broker says the billing, charging and customer management systems business should benefit from significant demand, as the pandemic has emphasised the dependence on telecoms infrastructure.

It notes that the former Logica division delivered revenues growth of about 25% in 2021, compared with an average of 9.1% over the previous three years. “This increased demand is not a transient factor and we estimate revenue growth of 20% for 2022 and 2023 as Cerillion has increasingly won larger contracts with larger customers,” Liberum comments.

It has a “buy“ recommendation and price target of 1,120p, which compares with 785p today.

Another favoured AIM-listed stock is gaming firm Frontier Developments, which Liberum believes should benefit from the expanded player base created by Covid-19 lockdowns. A profits downgrade in January means Frontier's share price is down by about 23% this year, but Liberum is still forecasting revenues growth of 22% for this year and 26% In 2023.

It adds: “Exciting new launches such as F1 Manager and Warhammer Age of Sigmar will add to its high-quality portfolio over the next 12-24 months. We continue to see Frontier as a top-quality games publisher that is well positioned to benefit from broad growth in the gaming sector.” Liberum's new 2,420p target price implies an upside of about 75% on the current share price.

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