Best growth stocks to watch
Growth stocks aim to outperform the wider market. We list five of the best growth shares to watch, selected by their capital gains in 2023.
What's on this page?
What is a growth stock?
A growth stock refers to a company that is expected to see its financial performance and share price outperform the wider market. They tend to be smaller stocks or startups that are gaining momentum in disrupting their industry and often boast a unique selling point.
Pros and cons: why invest in growth stocks?
The investment case for growth stocks mostly boils down to one thing: share price appreciation. As suggested in the name, these stocks are focused on growing and this means they are reinvesting any money that they are making. It is rare for a growth stock to pay a dividend (but there are still plenty), and it is common for them to be burning through cash and be unprofitable.
The lack of dividends means many growth stocks are unsuitable for income investors that target steady and established companies with generous and reliable payouts.
The size and potential of growth stocks mean share prices can be extremely sensitive. One contract or announcement can make or break a company. For example, a pharmaceutical growth stock can see its share price skyrocket if its new drug wins approval from regulators, or plummet to zero if trials don’t go well and it has nothing else to fall back on.
Ultimately, growth stocks are geared to head higher, but they are generally more vulnerable. Those investing in growth stocks have confidence in the company’s prospects and valuation, but it is twice as easy to lose value as it is to gain it in the first place. The potential rewards can be huge for growth stocks, but so can the risks.
How to identify and pick growth stocks
Although most growth stocks are small or fledging companies, they can also be large market leaders. Take Amazon as an example. It is the largest cloud-computing company in the world and the first name to be mentioned when discussing ecommerce, but the company does not pay a dividend and reinvests all of its money because it is still chasing growth.
Amazon is in the top five most valuable publicly-listed business in the world, worth $1.6 trillion, but the company is still expanding and diversifying into new areas and its share price continues to find higher ground. Even someone who made an investment in Amazon as recently as a year or two ago has made huge sums.
Still, all growth stocks share some characteristics regardless of their size. The first is an ability to report financial results that are significantly better than established peers. If the UK banking industry saw average growth in profits of 2% but a smaller challenger bank reported 10% growth, then this would suggest it is outperforming the wider market.
The second feature of a growth stock is that it has faster growth in share price than peers and rivals. For context, the 239% increase in Nvidia shares in 2023 compares favourably to the 43% rise in the Nasdaq Composite.
The third characteristic is that the stocks are poised for growth with a clear catalyst in the making. Take a junior mining company that is building a new gold project. Construction is expensive and it can’t make any income until after it is built, but once the mine is finished, then the valuation and investment case for that company completely changes.
Investors always slap large discounts on these types of companies, but these often melt away once they have delivered and are generating income. Many investors look for companies that are set to reach key milestones in the near future.
How to trade and invest in growth stocks
Decide whether you want to invest in shares or trade them. If you invest, then you buy the shares outright and are entitled to any dividends that are paid. You are not entitled to dividends if you trade shares and you don’t own them outright, but you can use leverage.
Open an IG share dealing account if you want to invest, or use IG’s spread betting or CFD services to speculate on share prices. You can also practice your trading strategy by opening an IG demo account first, which allows you to try out your investment or trading strategy completely risk-free.
Growth Exchange-Traded Funds (ETFs)
Investors may also want to consider using exchange traded funds (ETFs) as a way of gaining broader exposure to high growth stocks. These ETFs invest in fast-growing companies with the hope of matching or outperforming benchmark indices.
For example, the Vanguard Growth ETF, one of the largest growth ETFs on the market, aims to track the performance of the CRSP US Large Cap Growth Index. This means it focuses on larger companies that are still growing fast, like Amazon. Meanwhile, the Vanguard Small-Cap Growth ETF invests in smaller businesses that are more commonly associated with growth stocks.
You can find an ETF to suit any investment strategy you desire by using IG’s ETF Screener.
Top 5 UK growth stocks
Below is a small selection of UK stocks that outperformed the wider market both in terms of their financial performance and share price last year. Indeed, these were the five best-performing FTSE 250 shares in 2023 by capital gains. But remember, past performance is not an indicator of future returns.
Carnival shares more than doubled in 2023, rising to be the top FTSE 250 performer of last year. The cruise operator was, for obvious reasons, hit hard by the pandemic — but recovered on the post-pandemic travel boom as UK consumers continued to prioritise holidays even in the face of the wider cost of living crisis.
The company saw revenue reach $5.3 billion in Q4 2023, noting that ‘recent booking volumes for the two weeks around Black Friday and Cyber Monday reached an all-time high for that period.’ The company owns P&O Cruises and Cunard, which operates the Queen Mary 2, Queen Elizabeth and Queen Victoria.
CEO Josh Weinstein enthuses that ‘we entered the year with the best booked position we have ever seen, and now have nearly two-thirds of our occupancy already on the books for 2024, at considerably higher prices.’ It expects to generate adjusted EBITDA of $5.6 billion in 2024 — representing upside of circa 30% on 2023.
AO World, the well-known FTSE 250 electrical retailer, upgraded current financial year pre-tax profit guidance from ‘around £28 million’ to between £28 million and £33 million in November. Buoyed by stronger margins and higher cash generation, the company nevertheless also downgraded its revenue guidance by 10% due to the cost of living crisis and generic inflationary pressures.
For context, the FTSE 250 stalwart swung from a loss of £12 million to pre-tax profit of £13 million in the six months to September 2023 — but sales fell by 12% to £482 million, which was partially blamed on the decision to start charging for all deliveries.
This was a divisive strategy move; some investors consider that AO World has seen sales, and therefore market share, drop off as a result — in exchange for increased profitability.
Mitchells & Butlers
Mitchells & Butlers also benefitted from post-pandemic demand in 2023 — but for food and drink rather than travel demand. In the company’s financial year to 30 September 2023, like-for-like sales grew by 9.1%, with total revenue up to just over £2.5 billion.
However, operating profit fell from £124 million to £98 million, due to the lack of government financial support that was received in the prior financial year and paper losses incurred on its property portfolio. But adjusted operating profit increased by 17.6% when government support was excluded.
The restaurant group has also set up further growth after acquiring the Ego restaurant brand in June.
JD Wetherspoon benefitted from many of the same tailwinds as Mitchells & Butlers in 2023. However, it did also enjoy some specific success; the balance sheet improved as the company as able to sell interest rate swaps early on in the year, sales grew fast as inflation eased, and it spent much of the year either disposing of leasehold pubs or converting them to freehold, a far more stable set-up for long-term growth.
Not having to pay ground rent means the chain can sell food and drink for less than competitors, and its value offering could be an advantage if the UK slips into recession in 2024. For context, in the 25 weeks to 21 January 2024, like-for-like sales were 10.1% higher than the same period a year ago.
First Group also had an excellent 2023, again driven by the resumption of normal travel demand. In recent half-year results, adjusted operating profit rose by 52.2% year-over-year to £100.6 million, while adjusted EPS increased from 4.6p to 8.1p as demand for bus and rail rallied.
However, the company did suffer a one-off £142 million settlement charge resulting from pulling out of two local government pension funds, resulting in an overall pre-tax loss of £68.4 million. But total revenue rose from £427.7 million to £504.9 million, even when including a £19 million reduction in pandemic-related government grant funding.
Looking ahead, analysts expect fiscal 2024 to deliver a £13 million rise in underlying profit to £95 million, driven by £4.7 billion in sales for the full year to March 2024.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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