Investing in FTSE 250 companies is all about being selective. After all, with such a large catalogue of shares to choose from, there are certainly better choices than others. One company that stands out to me is Alfa Financial Software (LSE:ALFA). The analyst consensus is that this gem could deliver 15% price growth within just 12 months.
High growth is how I like it
Sometimes I’m tempted to choose shares with slower growth and a higher dividend yield. However, this isn’t my usual preference. Instead, I’m searching for the highest returns I can find. Almost always, this comes in the form of a sturdy growth stock.
Alfa is a business focused on providing software solutions to the asset management industry. This is a high-barrier-to-entry field with specialised requirements. Particularly at the moment, financial institutions are investing heavily in tech to become more efficient. Therefore, the shares are well-positioned to continue growing.
While its position in the market is formidable, it does face heavy competition. This includes FIS, which is a much larger firm with a broader portfolio. Its international presence could be a significant inhibition of Alfa’s potential for expansion as it already dominates the market share.
A rich valuation
Strong growth always comes at a price. With a price-to-earnings ratio of 28, Alfa is not cheap. Its valuation has also been rising over time, meaning that the market is fully aware of the impressive expansion on offer here.
The valuation is a reason for me to be cautious. In my opinion, it opens up a significant chance of volatility if the company fails to meet its high growth expectations.
Therefore, it’s important that I diversify my portfolio thoroughly. This will help to protect me if the stock price falls because the company has a bad quarter or year.
Taking risks is worth it
Just because a company has a high valuation, doesn’t have to mean the stock is too expensive for me. On the contrary, a rich valuation can often mean the firm is well worth investing in. If many people think fondly of a business and buy its shares, a rising price is a good signal that management is operating well.
Therefore, I’m quite comfortable taking on the valuation risk with Alfa shares. With a strong annual revenue growth rate of 7.5% estimated by analysts for the next three years, the company isn’t showing any signs of slowing down soon.
One thing to bear in mind is that this investment only comes with a small dividend yield of 0.6%. Therefore, if I do decide to invest in it, I’ll really be investing in its growth prospects, not its income potential.
Patience, selection and prudence
I always take my time when choosing businesses to add to my portfolio. Warren Buffett taught that it’s not the number of investments we make that matters but the quality of those we choose. Considering his company, Berkshire Hathaway, is nearly at $1trn in market cap, I’d be wise to take his advice.
For me, Alfa is a strong company, but it’s not the best I’ve found. Therefore, I’m going to keep looking. There are plenty of even stronger investments that The Motley Fool frequently identifies.
This post was originally published on Motley Fool
