Diary of a Private Investor

Six of the Best Growth Shares in 2017

Continuing this seasonal “Six of the Best” series, today I’ll be sharing my favourite growth shares for the year ahead. Every growth share is only a profit warning away from becoming an investment dog of course and no more so is this the case than with smallcaps. At the same time, smallcaps also provide an edge for private investors seeking growth. Firstly, they are small and therefore have the potential to grow – I know that’s stating the bleedin’ obvious but I believe it is a good starting point for finding growth companies to invest in. Secondly, they typically receive thin broker and analyst coverage which means the forecasts can often be wrong, providing the potential for both over and under performance and an edge for private investors doing their own research and analysis. The third factor to pay attention to is the often poor liquidity in many smallcap shares. This leads to wide bid/offer spreads, exaggerated rises on the way up and exaggerated falls on the way down which provides both risk and opportunity of course.

Each of the growth shares I believe will perform well in 2017 share some common characteristics; low/no debt, strong FCF, rising EPS, strong or rising momentum and with one exception, paying a dividend. Most also have geographically diversified earnings with a particularly bias for USD earnings as I believe the dollar will remain strong against sterling in the year ahead.

#1 Revolution Bars Group (RBG)

RBG operate a growing chain of trendy, themed bars. UK retail is generally a sector I am avoiding in 2017 due to the likely impact of rising inflation via higher import costs. However, a business like RBG should be largely immune from this effect. It’s not a business I would stay invested in long-term because the concept can become untrendy as quickly as it becomes trendy but for now at least, each new location is funded from free cashflow and quickly adds to the rising EPS. RBG have no debt and a clean balance sheet. I have also noticed a rising momentum over the past few weeks as more people latch onto the growth story here.

Price at the time of writing – Bid 216p, Offer 230p

#2 Petards Group (PEG)

PEG began as a bit of a punt for me in 2016 but has become a more serious growth prospect for 2017 and I believe potentially into 2018/19. It is a microcap, selling CCTV for ruggedized environments, valued at less than £10m and the shares are highly illiquid. It took me 6 tranches to build my current overweight position and if I have called this wrong, I accept that my loss could be as much as 50% in the event of a profit warning or other bad news. Against this, the company have announced over £10m in contract wins over the past six months, most related to new train builds via three framework agreements with global manufacturers. My own research suggests they will beat current forecasts which in themselves show a reasonably priced forward PER of 13.6. There is the prospect of a maiden dividend in 2017, alongside a rising EPS, increased broker forecasts and potentially, further significant contract wins. I believe that many investors are deterred by the microcap status of PEG and feel that once it breaks £10m it could easily rise 50-100% as more investors buy into the growth story.

Price at the time of writing – Bid 26p, Offer 26.5p

#3 Beximco Phapmaceuticals (BXP)

BXP are a generic drug supplier based in Bangladesh. Ordinarily, I am very cautious about investing in overseas companies listed in London but BXP is a long established company on an undemanding rating (forward PER 8.6) for a company with rising EPS, growing into international markets, including the US and paying a handsome dividend. It makes sense to me that in order to support this growth into international markets, a London listing is a good idea.

Price at the time of writing – Bid 46p, Offer 49p

#4 Bioventix (BVXP)

BVXP shares have had a volatile year, falling out of bed in the aftermath of the Brexit vote, only to rebound sharply in the months since then. Again, the shares are illiquid and in this instance, I am very confident to hold these shares for the long-term. They pay a decent dividend, generate healthy amounts of cash alongside growing and predictable earnings. A legacy product will fall out of the earnings stream in the middle of 2017 but this will be more than compensated by the launch of their new Troponin antibody. The precise timing of this launch is unknown but is expected during 2017. If and when this launch is confirmed, I can see the shares moving sharply upwards.

Price at the time of writing – Bid 1300p, Offer 1400p

#5 D4T4 Solutions (D4T4)

Shares in D4T4 spent much of the year stuck either side of 150p with low volume and little interest. However, strong results for the year ended 30th September have seen a rerating towards the 200p mark and this is mainly a play on that rising momentum, supported by rising EPS, continuing through 2017. I will be keeping an eye on cashflow here though. The surprisingly low cash balance and high receivables reported in the interims were explained by the house broker but I want to see that anomaly corrected in the full year results.

Price at the time of writing – Bid 190p, Offer 195p

#6 Zytronic (ZYT)

ZYT is another company that has seen share price volatility in 2016. Mainly this was led by a mild underperformance as the company transitions from old generation to new generation products. The growth of the latter seems to be gathering pace and in the absence of evidence to the contrary, I would anticipate a steadily rising share price for ZYT in 2017, supported by a decent dividend.

Price at the time of writing – Bid 390p, Offer 400p

It would be terrific if I was reviewing these growth shares in a year’s time and all six had grown steadily throughout the year, supported by stellar business performance, rising EPS, rising dividends and rising cashflow. Of course, things never quite work out this way but overall, I will be happy if 4 out of 6 of these picks perform well over the year, even if I have to suffer some inevitable disappointment, volatility or changing sentiment along the way. One reason for this, is that most of these growth picks are not cheap and so are vulnerable to sharp falls if they disappoint. This said, quality at a reasonable price (QARP) and/or Quality/Momentum can be very profitable strategies, especially when markets are rising, so let’s see what unfolds in the year ahead.

No investment advice is intended in this article and please do your own research (DYOR) before making investment decisions.

 

Happy investing folks!
Simon

 

Disclosure – At the time of writing, I own shares in all six companies mentioned in this article; RBG, PEG, BXP, BVXP, D4T4 and ZYT.

 

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