Five good-value, genuine growth shares

A case in point is the best-performing stock from last year's stock screen (see table), which was also the most 'expensive' based on its share price multiple of expected earnings. Estate-agency listings website Rightmove was highlighted by the screen on a giddying forward rating of 25 times earnings, yet it still managed to deliver a 73 per cent total return. But the other astronomically-rated share from last year, Telecity priced at 24 times forecast earnings, has recently been making the case for the opposition. Fears that the data-centre owner’s growth could be undermined by over-capacity in the data-storage industry coupled with its own commitment to further expansion, have caused its shares to tank.

Source: Datastream

However, Telecity was the only one of the five stocks selected last year that underperformed the FTSE All-Share on a total return basis. All in all the screen produced a very impressive 39.1 per cent total return compared with 22.9 per cent from the FTSE All-Share (see graph).

My 'genuine-growth' screen, which I modified a year ago to put more focus on valuation, attempts to find situations where growth and sentiment can be sustained and where good value is on offer once growth rates are taken into account. While broker forecasts are often regarded with scepticism, the screen hunts for forecast upgrades which I regard as a pretty good indication of the current trajectory of a business and sentiment towards it. I've had to waive last year's criteria for consistency of past earnings growth in order to get a decent fistful of results (still only five).

FIVE GENUINE GROWTH STOCKS

Berkeley Group

Housebuilder Berkeley (BKG) can hardly be described as cheap compared with its peer group trading, as it does, at a sector-topping premium to book value. However, the company offers investors two distinct attractions: growth and income. Indeed, long-term earning growth predictions are high enough to make the shares the 'cheapest' from our screen despite a historic PE ratio of 16 times.

The company is benefiting from the increasing health of the housing market, which is being buoyed by a number of government initiatives such as Help to Buy. It is also well positioned thanks to its focus on high-end hot spots. The attractions of the business are being boosted by the group’s ongoing pledge to return £13 per share by 2021. The group has 360p more scheduled to pay out in the next two years to keep up with the cash-return programme and its booming business suggests it will have little problems meeting this obligation. So with the government seemingly committed to engineering a pre-election house price boost, prospects for Berkeley should be good for some time.

Source: S&P CapitalIQ

Last IC View: Buy, 2182p, 5 September 2013

CLS Holdings

Property company shares are more usually judged by comparing their price to their book value (NAV) per share and the prospects for growth in that book value. But strong earnings growth does point to a company that has been successful in raising property values and increasing rents, so our growth screening criteria has a relevance to a company like CLS (CLI). What's more, CLS's shares' valuation compared with the 1,272p year-end NAV being forecast by broker Liberum looks reasonably attractive.

The company may well ultimately prove to be playing the property cycle very cannily at the moment. It has been busy buying high-yielding property this year including a recent £119m purchase of a portfolio of government occupied offices to add to another £41m of acquisitions. The low prices paid for these properties reflect issues with various things such as leases and locations, but CLS has a good track record of extracting value from such situations. What’s more, as the commercial property market recovery gains traction, investor demand can be expected to seep out from the prime property hot spots into less salubrious areas.

Last IC View: Buy, 1,186p, 17 Sep 2013

Easyjet

The woes of budget airline rival Ryanair have weighed on Easyjet (EZJ) of late. There are mounting fears that troubles at the Irish airline could prompt a price war in the industry, which would put Easyjet's profitability under pressure. Given the worries, the current growth forecasts have been viewed with a growing sense of scepticism. This is despite the fact that consensus forecasts recently nudged up following Easyjet's full-year trading update last month. At the time the group said good progress in the fourth quarter meant profits would be in the £470m-£480m range compared with previous guidance of £450m-£480m.

Price-war concerns aside, easyJet is in a strong position in the European short-haul market. It has cost advantages over many of its competitors and has also been benefiting due to the withdrawal from the market of rivals and increasing demand from business passengers. The company's strong balance sheet means it is in a great position to exploit the growth opportunities this situation throws up. Still, caution is understandable given the historically high valuation, recent negative news flow from a key rival and speculation that a price war could be looming.

Last IC View: Hold, 1,193p, 15 May 2013

St James's Place

Wealth management group St James's Place has seen its trading buoyed by the strength of the stock market. Not only has this tailwind raised funds under management thanks to an appreciation of asset values, but it has also increased demand for products. Indeed, the group's third-quarter sales rose 23 per cent on a year-on-year basis. The implementation of the retail-distribution-review IFA-commission ban is also believed to be helping St James’s business. And as the third-largest wealth manager in the UK the group is also considered to be in a good position to make market share gains over coming years.

The shares' valuation, at 1.25 times embedded value, looks fairly full, but broker Numis points out that on a total return basis the shares should make an attractive investment as long as the rating doesn't slip. The broker is forecasting annual EEV NAV growth of about 10 per cent a year through to 2016 along with a yield equivalent to 3.0 per cent in 2014, rising to 3.7 per cent the following year and then 4.4 per cent.

Last IC View: Buy, 666p, 28 Oct 2013

Sports Direct

Trading news from sports retailer Sports Direct (SPD) has been very encouraging this year although management has been coy about pushing up guidance. That hasn't stopped brokers from beginning to nudge up their full-year forecasts up though, and there could be much more to come if Sports Direct remains on its current trajectory.

As well as mid-teens growth, the group has been pushing up its gross margin. What's more, as the year progresses comparisons with 2012 should get easier as historic numbers will no longer reflect the trading fillip that was caused by the London Olympics. The company is also pursuing growth opportunities in Europe and could benefit from a pick up in the eurozone economy as at the same time as it opens more stores. The improving domestic economy should also help.

Last IC View: Hold, 635p, 18 Jul 2013