10 exciting growth shares trading higher this year

Stockopedia’s Ben Hobson highlights a handful of companies likely to appeal to growth investors.

​​​​​​If you were to describe the type of shares that performed best in the stock market last year, ‘quality’ would sum it up pretty well. In unsettled conditions, it was strategies that pinpoint profitable, well-financed, safe, strong companies that delivered the best investment returns.

And that is exactly what you’d expect. But in the first half of this year, ‘growth’ has taken the lead as the best-performing investing style. So what does that mean?

Growth - in one form or another - plays a part in many strategies. It could be dividend growth, sales growth, cashflow growth, the list goes on. There are hundreds of measures and metrics that investors use to find growth trends. But more typically, growth strategies tend to orientate around earnings (the profit that companies make).

When it comes to finding businesses that are accelerating - and could see their share prices re-rate as a result - earnings expansion is an important lens. Take the price-to-earnings ratio - that classic measure of a stock’s valuation.

The PE ratio compares a company’s share price with its earnings-per-share. Generally, the higher the PE ratio, the more you’re paying for the earnings that the company is generating. Very broadly speaking, higher PE ratios tend to be found in stocks where earnings have been growing quickly and are expected to continue.

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The relationship between price and earnings is a focus of several well-known growth strategies. Famous investors such as Jim Slater, Peter Lynch, James O’Shaughnessy and Martin Zweig all came up with approaches that aim to buy growth without overpaying for it.

They take a measure of both factors and usually look for positive price momentum as an important extra signal that the trend is on their side.

One strategy tracked by Stockopedia that has done particularly well since the market crash in early 2020 is ‘James O’Shaughnessy Cornerstone Growth’. O’Shaughnessy is highly respected for his quantitative research into the factors that deliver stock market outperformance. This strategy is one of his earlier approaches. It mixes a focus on a low price-to-sales ratio, positive earnings growth and strong price momentum.

In the turmoil last year, this strategy was hit hard, but it has returned a 46% gain over the past 12 months, and 19.8% in 2021 so far. Here are some of the companies that pass the strategy rules:

This O’Shaughnessy growth strategy will pick up any stock with a market cap of more than £100 million, and that produces a wide range of results. Companies here span large-caps such as Royal Mail and Evraz, to small-caps such as the mining group Gem Diamonds and furniture retailer SCS.

The fact that “growth at a reasonable price” strategies have come to the fore in 2021 is encouraging. These approaches flourish in upbeat market conditions when investors are feeling bullish. They can also be a useful way of finding potential value stocks that are seeing a change in fortunes, which is showing up in their earnings.

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Royal Mail, which tops the current list, is a good example of this, having benefited from surging demand for postal services during the Covid crisis. Likewise, freight management and fulfilment companies like Xpediator and Clipper Logistics have found themselves in demand - as have retailers like Halfords and Gear4Music.

For investors, a focus on earning acceleration is usually the first step in pursuing growth stocks with the potential to see their share prices soar. After a very unsettled 18 months, we’re seeing some promising results from this strategy.