Is 50%+ earnings growth sustainable at these hot stocks?
Growth stocks with sustainable profit growth of more than about 20% each year are pretty rare. But finding such a company and investing at an early stage can deliver spectacular profits. Legendary growth investors, such as Jim Slater and Peter Lynch, built their reputations on such stocks.
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One of the FTSE's current star performers is Just Eat (LSE: JE), the online takeaway ordering service. Thanks to a combination of organic growth and acquisitions, Just Eat's operating profit has risen from £6.8m in 2013, to £38.5m last year.
Just Eat shares have risen by 90% since its flotation in April 2014. Is the good news already in the price, or is there still time to buy?
What do the numbers say?
Just Eat's sales rose by 59% to £171.6m during the first half of this year. The number of orders handled by the firm rose by 55% to 64.9m.
Some of this growth is the result of acquisitions made in Italy, Brazil, Mexico and Spain earlier this year. But a good chunk of it came from the firm's existing operations, which generated a 40% rise in like-for-like orders.
Just Eat's adjusted earnings rose by 81% to 5.6p per share during the first half of this year. A similar increase is expected during the second half, with broker forecasts suggesting that adjusted earnings will rise by 180% to 11.3p per share this year.
Is Just Eat a buy?
The price/earnings growth ratio -- or PEG Ratio -- was made famous by the late Jim Slater, who believed that it was one of the best ways to identify underpriced growth stocks. Mr Slater's view was that a PEG ratio of less than one indicated that a stock might be cheap, relative to its expected growth rate. A PEG ratio of more than one was expensive.
Just Eat shares currently trade on a 2016 forecast P/E of 49, falling to 33 in 2017. That's expensive, but possibly not as expensive as it sounds. The shares have a PEG ratio of 1. That suggests to me that the stock is fully priced, but not necessarily overvalued. I'd hold.
A very different opportunity?
The diamond market went through a tough time last year, but is showing signs of improvement. Despite this, South African miner Petra Diamonds (LSE: PDL) remains modestly valued, relative to this year's expected earnings.
Petra's profits are expected to rise by 66% to $90m during 2016/17, as ore grades improve, and the Cullinan expansion programme starts to deliver results. Petra's most recent trading update suggests that results will be in line with expectations.
The stock currently trades on a 2016/17 forecast P/E of 11, with a prospective yield of 1.4%. Earnings per share are expected to rise by another 60% in 2017/18, supporting a forecast P/E of 7 and a prospective dividend yield of 3%.
Although the group's net debt of $463m is at the upper end of what I'm comfortable with, the firm expects to start repaying debt in 2017. Last year's 25% operating margin suggests to me that cash generation could be strong, if production rises as expected.
Petra shares currently have a PEG ratio of just 0.2. This indicates to me that big gains could be possible, if market conditions remain stable.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
