There will be plenty of challenges for investors in 2022, but this City expert has found lots of good-quality businesses capable of growing faster than their peers. Find out who they are here.
Growth stocks including JD Sports Fashion (LSE:JD.), Future (LSE:FUTR) and online retailer ASOS (LSE:ASC) have been named by a City broker as among 39 able to ride out concerns about rising interest rates in 2022.
Peel Hunt's top picks list also features Oxford BioMedica (LSE:OXB), Sirius Real Estate (LSE:SRE) and OneSavings Bank (LSE:1SBB), as well as consumer-facing Dunelm (LSE:DNLM), Games Workshop (LSE:GAW) and WH Smith (LSE:SMWH).
The list was published on the day that technology and other growth stocks fell sharply on the prospect that US interest rates will rise sooner than expected, possibly as early as March.
But Peel Hunt believes the London market should remain attractive for investors in good-quality businesses that are capable of growing faster than their peers.
Its list features stocks across 12 sectors, with media, retail, builders and technology stocks the most represented. There's an average market capitalisation of £1.85 billion and the picks trade on a median 28 times 2022 earnings, dropping to 23 times in 2023.
Last year’s 41 growth selections delivered an average total return of 12%, behind the 18% for the FTSE 100 and FTSE All Share as 27 stocks saw a positive return and 14 declined.
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The best performing of 2021’s crop was digital transformation services business Kin and Carta (LSE:KCT) with a 105% rise, followed by gains of more than 70% for Gulf Keystone Petroleum (LSE:GKP), Mortgage Advice Bureau (LSE:MAB1) and the north of England “beds and sheds” firm Harworth (LSE:HWG).
The quartet are among the 15 stocks repeated from last year's list, with the broker regarding Kin+Carter as being at the start of an exciting growth phase.
Analyst Malcolm Morgan said Covid has accelerated and highlighted the need for companies to have a robust integrated digital strategy: “Providing digital transformation services in the Americas and Europe is the foundation for a decade of robust growth in our view.”
The company has experienced a significant re-rating in the last 28 months, but Morgan believes there's the potential for shares to reach 375p.
He's also a fan of 4imprint (LSE:FOUR), the North America-focused promotional goods company whose fortunes have been hit by the impact of Covid on conferences and other face-to-face gatherings.
Morgan said: “As the world economy moves on from the pandemic, 4imprint’s core skills should reassert themselves. We expect 2022 to be the year the company regains its strong underlying growth, and takes market share from the smaller industry players.”
Shares closed on Tuesday at 2,895p compared with Peel Hunt's target of 3,100p. Stocks on the list with the biggest potential upsides include ASOS, which is being backed to recover from last year's profits warning with a rebound towards 5,000p.
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Peel Hunt's retail team of John Stevenson and Jonathan Pritchard said the UK operation continues to outperform and ASOS has the strongest executive team in its history.
They said: “The equity story now hinges on how successfully the group cracks the US and Europe. This is a land grab of customer acquisition and frequency, delivered by relevance of offer, customer proposition and effective marketing.”
Peel Hunt is not expecting short-term upgrades but on 18.7 times earnings it sees “huge value” for longer-term shareholders.
Shares in AIM-quoted AB Dynamics (LSE:ABDP) have been backed to surge from 1,725p to 2,800p, which is based on the company being the only UK-listed pure-play on safety in passenger cars and autonomous vehicle development.
Peel Hunt said: “These are two of the most compelling long-term structural growth trends in the automotive market in our view, and as a leader in test equipment, working with all of the top 25 global automotive OEMs, we believe AB Dynamics is very well placed to take advantage.”
On the motion control and fluid technology firm IMI (LSE:IMI), the broker expects the unleashing of its “real potential” after chief executive Roy Twite's recent drive to reduce complexity and improve customer service and product development.
Peel Hunt said: “The IMI portfolio has had high-quality assets for many years, but for a variety of reasons these have not fired together simultaneously. However, this is changing, with a fundamental and structural realignment to deliver sustainable growth and premium margins.
“The IMI we are beginning to see has not been witnessed before, which is why we are so confident that our 2,500p target price is just a stepping stone.” Shares closed on Tuesday at 1,784p.
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Among the better-known stocks on the list, WH Smith is regarded as a key long-term buy with a 2,300p target. Peel Hunt's retail team said: “Obviously this is a name that is highly exposed to the momentum of Covid-19 and the consequent travel numbers, but we have every belief that the longer the problems persist, the stronger WH Smith will be, relatively, when they are over.
“Management is aggressively building out the portfolio, both in the UK and especially in the US, becoming one of the world’s foremost travel retailers. On 2020 earnings the shares look good value.”
JD Sports Fashion shares endured a tough finish to 2021 but are regarded by the broker as “the definition of a global growth story” and one that should trade on a price/earnings multiple in the 20s, leading to the price target of 260p.
Peel Hunt said: “Relationships with suppliers remain on an upwards curve, and whilst there may be minor bumps on the road with product availability next year, it should cope, given its position in manufacturers’ pecking orders.”
Consumer magazines and digital publisher Future has outperformed throughout the pandemic, but Peel Hunt believes a valuation of 23 times 2022 earnings continues to “undervalue a business of this calibre”. It has a price target of 4,500p.
There's also a significant runway ahead for Dunelm based on a 1,750p target, while Warhammer firm Games Workshop is backed to reach 12,500p as it benefits from recent investment in capacity and distribution capability.
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The other stocks on Peel Hunt's growth list are Abcam (LSE:ABC), Ascential (LSE:ASCL), Baltic Classifieds (LSE:BCG), Boku (LSE:BOKU), Clarkson (LSE:CKN), Clipper Logistics (LSE:CLG), discoverIE (LSE:DSCV), Energean (LSE:ENOG), GB Group (LSE:GBG), Grafton (LSE:GFTU), Hotel Chocolat (LSE:HOTC), Inchcape (LSE:INCH), Inspecs (LSE:SPEC), Marshalls (LSE:MSLH), Rathbones (LSE:RAT), Restore (LSE:RST), S4 Capital (LSE:SFOR), SigmaRoc (LSE:SRC), Trainline (LSE:TRN), Treatt (LSE:TET), Trustpilot (LSE:TRST), Warehouse REIT (LSE:WHR) and Watkin Jones (LSE:WJG).
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