The market’s best growth stocks are the ones that you can trust to produce returns year after year, with no effort on your part. These companies are challenging to find, but they are out there. You just need to know where to look.
One such company is innovative ingredient solutions producer Treatt (LSE: TET).
Creating value
Over the past five years, Treatt’s management has proven that it is one of the ablest set of leaders around. Over this period, pre-tax profit has risen by nearly 200% as sales have grown by 50%. Thanks to this growth, shares in the company have powered higher by almost 400% since the beginning of the second quarter of 2013.
And it looks as if this growth is set to continue. Today the company reported that following the performance for fiscal 2017 (when profit before tax jumped 46%), for the six months ended 31 March 2018, revenue increased 11% year-on-year. The core business categories of citrus, tea and sugar-reduction have “continued to drive top-line growth” while new business wins have bolstered the trading performance.
Management expects this trading momentum “to continue in the second half of the current financial year and beyond,” leading me to conclude that the market is undervaluing Treatt’s potential.
City analysts are expecting earnings per share to decline by 3.6% for fiscal 2018, which seems to be a conservative forecast considering today’s reported revenue growth, as well as the expected benefit from US tax cuts. With this being the case, I believe Treatt is one of the best growth stocks to buy now, ahead of a possible re-rating driven by better-than-expected trading performance.
A re-rating is already underway with another top growth stock, cybersecurity solutions provider Sophos (LSE: SOPH). Shares in Sophos jumped 20% in early deals this morning after the company said it anticipates reported billings growth for the year ended March 31 to come in towards the top end of guidance of 20% to 22% thanks to fourth quarter reported billings growth of approximately 23%.
Huge opportunity
Over the past four months, the stock has fallen out of favour with investors due to concerns about its valuation and growth potential. For example, to justify the current valuation of 85.1 times forward earnings, profits need to be expanding at a rate of 86% or more per annum. For 2018, analysts are expecting the firm to report its maiden profit of $0.07 per share, with earnings rising 61.4% to $0.11 for 2019.
This rate of growth alone does not justify the valuation, but in my view, the company deserves a high valuation due to the opportunity ahead of it.
The value of the cyber security market is currently growing at a rate of around 11% per annum and will be worth an estimated $165.2bn by 2023. If Sophos can grab just a 1% share of this market, its sales could triple from $529m reported for 2017 to $1.65bn by 2023. If earnings can grow at the same rate, I’m convinced that shares in Sophos deserve their current premium valuation.
