Three great growth stocks to buy

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Justin Waine, investment director, Puma Aim IHT Portfolio Service.

The Alternative Investment Market (Aim) launched as London's home for emerging companies in June 1995 with ten stocks.Now, 20 years on, it is the home to more than 1,000 companies with a total market value of nearly £73bn. While Aim is traditionally seen as a place for small, early-stage companies,the truth is more complex. Over 300 Aim stocks have market capitalisations of more than £50m, while four are over £1bn.

The Puma Aim Inheritance Tax Portfolio Service seeks to mitigate inheritance tax (IHT) by using business property relief, which is available to many businesses on Aim. An investor who holds a portfolio of qualifying Aim stocks for two years receives 100% relief from IHT on those stocks at the time of death. This is particularly useful for those with individual savings accounts (Isa), who can continue to enjoy the tax and easy-access benefits of an Isa alongside the IHT mitigation of Aim.

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The service also gives investors access to the growth of UK smaller companies througha concentrated portfolio of roughly 20 holdings. The target holding period is three to five years, keeping turnover low. I focus on three factors: quality, growth and valuation. For quality, I look for companies with a strong franchise, as demonstrated by good market position, brand strength and reputation. Companies should have high returns on capital employedand be converting their profits to cash.

I also look for companies that can grow over time I like those that re-invest the cash they generate to grow the business either organically or by acquisition. The final factor is valuation I buy companies at a discount to my estimate of fair value and I prefer companies with strong balance sheets that pay dividends.

FW Thorpe (Aim: TFW) manufactures commercial lighting systems. It is family controlled, with high profit margins, a post-tax return of capital employed well above its cost of capital, and a track record of turning profit into cash. The company has grown modestly in the last few years, but this masks a change in the business, with LED lighting growing from almost nothing five years ago to more than 50% of the business now. I expect the company to grow both organically and by acquisition.

It has a strongly net cash balance sheet, despite a recent acquisition. Taking into account this cash, it trades below fair value.Renew Holdings (Aim: RNWH) is a specialist construction and engineering services business. It provides these services to rapidly growing areas within UK infrastructure. It is involved in key areas, such as nuclear decommissioning, replacing water mains, and building flood defences. The company has strong returns on capital employed, and a track record of cash generation. Its balance sheet has only a modest amount of debt.

SafeStyle UK (Aim: SFE) is a retailer and manufacturer of PVCu windows and doors. It is the largest company (judged by installations) in the UK homeowner window and door replacement market. Safestyle was able to grow revenues throughout the recession by taking market share from its rivals. It has good earnings before interest and tax (EBIT) margins, very high returns on capital employed and a net cash balance sheet. I believe it will benefit from the recovery in the UK market and should also gradually be able to increase its market share, which is not currently priced into the shares.