As if inflation, supply chain disruption and the pandemic weren’t enough to keep investors on their toes, November looks like being a packed month for earnings announcements. With this in mind, here are three great growth stocks I’ll be giving particular attention to.
Quality… but at a price
Belfast-based IT solutions provider Kainos (LSE: KNOS) is down to report interim numbers on 15 November. Having more than doubled adjusted pre-tax profit to £57.1m in the previous financial year, it’s not unreasonable to think that the good times have continued. After all, the need for organisations to digitally transform their operations has never been greater.
This could be good news for the KNOS share price which has already climbed 61% in the last 12 months. I say ‘could’ because this really depends on whether the company is able to meet investors’ (lofty) expectations.
Kainos ticks many of my ‘quality growth’ boxes. High margins? Check. Strong returns on invested capital? Check. Low/no debt? Check.
The problem is that all this comes with an exceptionally high price tag of 53 times forecast earnings. So the risk here is that any slight misstep or loss of trading momentum might be poorly received by the market.
As things stand, that’s not an ideal risk/reward trade-off. Hence, I’ll be watching next month’s activity with interest.
Ticking time bomb?
I’ll also be following FTSE 250 member Watches of Switzerland (LSE: WOSG). Like Kainos, investors in the luxury timepiece retailer have enjoyed a brilliant run of late. Its stock is up a little over 180% since the end of October 2020.
Based on its Q1 update, I think there’s a chance this momentum will carry on when H1 results are revealed on 9 November. Back in August, the company said trading in the UK has been “exceptionally strong” and that the US business was seeing “excellent, broad-based growth”. Group revenue hit £297.5m — more than double that achieved over the same period last year.
WOSG shares currently trade at 33 times earnings. While still pricey, that’s far more palatable than its FTSE 250 peer’s valuation. Then again, operating margins in this line of work aren’t exactly massive (9% last year). It makes you wonder what might happen to investor sentiment if consumers begin to tighten their belts again as lockdown savings run out.
Could this growth stock actually be a ticking time bomb? We’ll soon find out.
Contrarian pick
Also on my watchlist is respirator and ballistics expert Avon Protection (LSE: AVON). Of the companies mentioned here, this is the one I’d be most likely to buy next month.
Labelling Avon as a ‘great’ growth stock may seem odd. The shares have plunged in value recently following news of order delays, supply chain disruption and a “tight labour market“.
To me, these issues are temporary. Even so, external forces could impede Avon for a while yet. As a result, I don’t expect a quick rebound when full-year results are revealed on 23 November. That’s despite the company saying it possessed a “strong order book” earlier this month.
Still, shares trade at under 20 times forecast FY22 earnings. This looks reasonable for a leader in a niche market with significant barriers to entry. Contrarians are also being compensated with dividends, although the yield is just 1.7%.
Taking into account this margin of safety, I’ll be hovering over the ‘buy’ button next month.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Avon Protection and Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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