I like to hold some growth stocks in my portfolio. If I had £20,000 to spend on UK growth shares right now, I would spread it equally across the eight companies below, giving me some diversification.
I would pick three shares that would give me significant exposure to the growth of the digital economy, although each has a different role in it. First is software provider Idox. It had a challenging few years and saw revenues shrink not grow. Last year, though, both revenues and operating profit returned to growth. With its government customer base, I see substantial opportunities for the company in coming years. One risk is price competition from larger rivals hurting profit margins.
I would also buy digital media group S4 Capital. The company plans to double its revenues and profits in a three-year period and has signed up blue chip clients such as BMW. By growing business with large clients, attracting new ones, and acquiring smaller agencies I think S4 could hit its growth targets. But rapid growth can add overhead costs. That may hurt profits.
I also think Computacenter could continue to benefit as customers upgrade their IT systems as part of a push to more digitalisation. It has deep experience and long-established customer relationships that could translate into ongoing revenue growth. One risk is that any economic downturn could lead to non-essential digital upgrades being suspended, hurting revenues and profits.
UK growth shares
I also like the growth strategies of a couple of companies with big ambitions.
One is instrument maker Judges Scientific. The shares have performed strongly lately but I think the company’s growth ambitions could propel it higher still. Its focus on applications where accuracy matters allows Judges to sustain premium pricing. As it gets bigger, it can benefit from economies of scale and a growing reputation. One risk is that competitors try to mimic its strong performance by bidding for the types of assets Judges has been buying at attractive valuations. That could slow revenue growth.
I also like kidney diagnostic specialist Renalytix. Its revenues remain small but I expect strong growth in coming years as a growing sales force increases the company’s installed user base across New York state in the US. One risk is the additional costs of the sales push hurting profit margins.
From pork to parkour
Selling pig meat is a growth business because demand is booming. Meat producer Cranswick recorded earnings per share growth of 11% last year. A dividend raise of 16% was the latest in a series of annual increases over more than three decades. But any sudden changes on export rules are a risk to revenues and profits.
Discount retailer B&M has found a winning formula selling well-known brands at keen prices. It has plenty of space to grow in the UK, which I expect to fuel higher profits in coming years. One risk is increased competition from online discounters. That could hurt revenue at B&M’s bricks-and-mortar operation.
Finally, I would buy JD Sports, which sells active sportswear for everything from football to parkour. Its first half results were the strongest ever. I see continued growth opportunities from the company’s aggressive international expansion. But competition in markets like the US could hurt the company’s profit margins.
Christopher Ruane owns shares in JD Sports, Renalytix and S4 Capital. The Motley Fool UK has recommended B&M European Value and Judges Scientific. 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 2022