Sirius Minerals is a popular growth stock among UK investors. Consistently one of the most-traded stocks on the London Stock Exchange, it has clearly captured the minds of many growth investors. However, as I explained in an article yesterday, I don’t see much investment appeal in Sirius. With profits still years away, and the company struggling to fund its major project, I view Sirius as a high-risk, speculative play.
In my view, a much safer small-cap investment strategy is to focus on companies that are already profitable and growing at a fast pace. With that in mind, here’s a look at two growth stocks I’d buy over SXX.
DotDigital (LSE: DOTD) is a fast-growing technology company that specialises in digital marketing. Its key product Engagement Cloud is an advanced digital marketing platform that enables companies to turn customer data and insights into powerful multi-channel marketing campaigns. Engagement Cloud is currently used by over 4,000 companies worldwide, including Oliver Bonas, Jet2.com, and T.M Lewin.
DOTD has grown significantly in recent years with earnings per share jumping from 1.63p in FY2015 to 3.16p for FY2018 – a compound annual growth rate (CAGR) of 25%. Analysts have a figure of 3.48p per share pencilled in for the year ended 30 June 2019 along with a forecast of 3.90p for FY2020, which suggests the group is set to continue growing. In late July, the company announced that adjusted EBITDA for the last financial year is expected to be slightly ahead of market expectations.
From an investment perspective, there’s a lot to like about DOTD. Return on capital employed (ROCE) is excellent, averaging 26% over the last three years, operating margins are high, and the group’s balance sheet is robust. Cash flow is also strong, and the group has a good track record of dividend growth.
Yet despite DOTD’s attractive attributes, the stock is not overly expensive. After a pullback in the share price over the last two months, it currently trades on a forward-looking P/E of 22.5. At that valuation, I think there’s a good chance long-term investors could be rewarded handsomely.
Another high-growth tech stock that I like right now is D4T4 Solutions (LSE: D4T4). The reason I’m bullish on this company is that it specialises in data solutions, helping other companies with data collection, management, and analysis. Data is big business today (some people say it’s the new oil) so I’m expecting significant growth in the years ahead. With a market capitalisation of just £90m currently, there’s plenty of room for D4T4 to grow.
Like dotDigital, D4T4 has a number of attractive attributes. For starters, profits are expanding at a rapid rate – last year adjusted earnings per share jumped 57%. In addition, ROCE and operating margins are high, debt is low, and the company has increased its dividend significantly in recent years. Management also appears to be confident about the future, stating recently: “Looking forward there are many opportunities to continue our growth in our core markets where we expect to develop our business with existing and new customers, increase our share of current markets and continue to expand internationally.”
D4T4 shares currently trade on a forward P/E ratio of just 16.3, which I think is an absolute steal all things considered. Given the growth potential here, I see considerable scope for gains.
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Edward Sheldon owns shares in dotDigital Group and D4T4 Solutions. The Motley Fool UK has recommended dotDigital Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019