To turn an investment of £1,000 into £5,000 – a 500% return – I’ll look to use this new ISA tax year to build UK growth shares into my portfolio.
The plan for big returns from investing
The esteemed growth investor Jim Slater said elephants don’t gallop. In other words, shares in large-cap companies can’t rise as quickly as share in smaller-cap companies. Other successful investors have echoed that sentiment. Though there’s nothing wrong with big companies, and I own many myself, smaller companies have more potential to grow.
It’s because smaller growth shares tend to be more agile and innovative, as well as more likely to be acquired, that they are potentially rewarding investments.
The flip side, of course, is that sometimes their share prices are more volatile. They can lack the balance sheet strength and diversification of some of the bigger companies.
Also, growth shares tend to reinvest in their business so many don’t pay out dividends, although of course, some do. Generally, I’m happy though with reinvestment into the business if it is done well and helps the company grow.
Smaller UK growth shares make up part of my portfolio, as I don’t want to just invest in FTSE 100 dividend paying stocks.
Examples of UK growth shares
Ergomed is one example of a UK growth share that I potentially would invest in. Between 2016 and 2020, revenues went from around £39m to over £86m. At the same time, operating profit went from being practically negative to up to £13.5m. To me, this is impressive. This rate of growth, along with the shares already having risen 500% in just a few years, are two of the factors that make me think the share price can rise strongly.
Performance at the pharmaceutical industry services company continues to be strong. 2020 was a very good year and I expect the future is very bright for the group. The risks with this share are that it overpays for acquisitions (often this hurts shareholder returns) and that its investment in drug development doesn’t work out as planned.
I also like the look of retail logistics company Clipper Logistics (LSE: CLG). It has benefitted from the move to e-commerce – a trend that is set to continue even once lockdown lifts.
Customers want to shop online more and more because it is convenient. There’s a structural change in retail that benefits Clipper Logistics and should therefore help its share price continue to rise.
The management at Clipper Logistics has been able to upgrade their forecasts, which is something I always want to see when it comes to a growth share.
I think past performance provides reasons for optimism about the future. It’s why a 500% share price rise could be on the cards. Between 2016 and 2020, revenues nearly doubled, going from £290m to more than £500m. Operating profit more than doubled at the logistics company, from £14.5m to £31.5m. Any improvement in margins at the e-commerce company could be transformational and see the shares reate upwards.
The risk is that there’s a slowdown in e-commerce following the pandemic which could hit sales growth. Or that the shares are seen as too expensive on a price-to-earnings of 38, which is quite high for any business, let alone a logistics business.