Three strong growth stocks

Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Lucy Macdonald, co-manager, Brunner Investment Trust.

Companies that have the opportunity and scope to grow, and the proven ability to do so profitably and sustainably, are great generators of long-term wealth for investors.

Growth can be derived from innovation and product development and/or by accessing new markets with existing products. We prefer this kind of ‘organic’ growth, but small, targeted and appropriately valued acquisitions can also accelerate development.

Returns on investment that are higher than average and slow to fade, whether due to patents, licences, brands or market positioning, are the magic ingredient driving long-term compound growth.

Good management is vital. Balance-sheet strength is also attractive. The last factor we take into consideration is valuation, where we judge whether the attractive characteristics we’ve identified are fully discounted in the share price.

Biopharmaceutical firm AbbVie (US: ABBV) was spun out of Abbott Laboratories last year. Its key rheumatoid arthritis drug, Humira, is growing sales at a double-digit rate. Its pipeline of new drugs in development holds out the prospect for further growth in the future in its its areas of immunology, neuroscience and oncology.

Final trials have just been announced for its hepatitis C treatment – this is coming along better than expected. Cure rates are similar to those of major competing drug Sovaldi, which launched last year, but this news has not yet found its way into the share price.

Earnings before interest and tax (Ebit) margins are around 35%, despite some drag from launch costs this year, with sales of associated new products yet to be factored into forecasts. The valuation offers growth opportunities, with a modest teens multiple, a yield of 3.3% and dividend increasing to 5%.

Priceline’s (US: PCLN) online travel booking website is in a structural growth phase – bypassing the travel agent has improved efficiencies and cut costs for customers. With Priceline.com, Booking.com and Agoda.com, Priceline has strong brands in America, Europe and Asia.

Barriers to entry for travel businesses are relatively high – it takes time and money to build up a respected brand and a relationship with thousands of hotels. Recent data show that occupancy rates and revenues are on the up for European hotels, which is a key driver of future investment.

The valuation has risen to around 20 times earnings, but remains below the growth rate, so the shares offer unusual upside potential for this type of business.

Weir (LSE: WEIR) is an engineering firm with leading positions in the oil and gas and mining-equipment markets. The company produces cash returns well in excess of the cost of capital. Operating margins are close to 20%, supported by a high proportion of aftermarket sales – selling ongoing services – which raises barriers to entry and makes earnings more predictable.

We think there will be continued growth in the shale-gas industry, an important end market for Weir, and expect spending on capital expenditure (capex) in mining to stay steady. Cash flow will recover as cost pressures ease in the coming 18 months. The valuation is at an uncharacteristic discount to global peers.

Overall, equity markets are having a pause after their strong performance last year. This is offering up better investment opportunities than we have seen for a while.

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12