Eye-watering earnings growth

Alpha FX’s (LSE:AFX) share price is up nearly 10% in the last year, while over the past three months it’s down 24%. At the time of writing, the shares are trading at 1,820p.

One way I like to gauge how quickly a growth stock is expanding is by looking at its historical earnings per share (EPS) growth. Between 2017 and 2021, the company’s EPS rose from 17.5p to 58.3p. 

By my calculations, this means that the firm – a business providing financial solutions within foreign exchange – had a compound annual EPS growth rate, or the constant rate of return per year, of 27.2%. This is both strong and consistent, but it’s no guarantee of future performance, of course.

In its full-year results, the business reported that revenue had risen 68% to £77.5m, while pre-tax profits nearly doubled to £33.18m, year on year. 

It’s also interesting to note that this company is debt free, having managed to build up a strong cash balance over recent years.

In addition, client numbers increased by 27% and average revenue per customer grew by 32%. Furthermore, the dividend payment rose from 8p to 11p, from 2020 to 2021, although I’m slightly concerned about the potential impact from the broader economic climate of rampant inflation.  

Growth through acquisitions

Next GlobalData (LSE:DATA) may also offer me attractive growth. In the past year, the shares are down 44%, while in the last three months they’re down 25%. At the time of writing, they’re trading at 960p.

Its EPS grew from 17.21p to 30.8p between 2017 and 2021, resulting in a compound annual EPS growth rate of 12.35%. While this isn’t as high as Alpha FX, it’s certainly competitive.

Between 2020 and 2021, revenue increased from £178.4m to £189.3m, while pre-tax profits rose from £28.6m to £32.6m. 

The business – an industrial intelligence firm – has made two acquisitions recently, expanding its reach into the automotive and agribusiness industries for “fuller scale and capabilities”.

It also paid a dividend in 2021 of 19.3p, up 14% on 2020. There is always, however, the threats posed by wage and cost inflation.

Overall, these two companies present me with appealing buying opportunities for long-term growth. The share prices have both fallen in recent times, so it’s potentially an attractive time to load up on the shares. I therefore think I will be adding these businesses to my portfolio very soon. 

What is the Alternative Investment Market?

The AIM is a sub-market of the London Stock Exchange (LSE). It is designed to help smaller firms access capital from the public market. The AIM allows these firms to raise capital by listing on a public exchange with more regulatory flexibility than the main LSE stock market.

The AIM is often seen as a more specialised unit of the LSE, catering to smaller, riskier firms. These firms are often more speculative in nature. This is in part due to the AIM’s more relaxed regulations and listing requirements. Since launching in 1995, the AIM has helped more than 3,865 companies raise more than £115bn.

As it stands, the AIM is home to over 850 firms with a combined market capitalisation of over £100bn. When a firm seeks an initial public offering (IPO) and listing on the AIM, they do this to access more capital. Often due to their size, they are not at the level to list on a large exchange. The process for a company listing on the AIM is similar to a traditional IPO, just with less strict requirements.

One major difference I found was the role that nominee advisers, often referred to as ‘nomads’, play in the process. These nomads are seen as the regulatory system for the AIM. They advise companies pre-IPO and after. One gripe frequently raised about this relationship is that nomads are responsible for regulatory compliance, but also profit in the form of fees from the firm they list. The regulation for firms listed on the AIM is often referred to as being ‘light touch’ compared to a major index.

Best stocks to buy now #1

My first pick from the FTSE AIM is growth stock AB Dynamics (LSE:ABDP). I believe it is a perfect example of an AIM success story. AB is involved in the automobile industry. It provides testing equipment and advanced measurement services to car producers in the UK and overseas.

Launched in 1982, AB Dynamics is not a new up-and-coming stock. In fact, it has continued to grow on a slow and steady basis. This is one of the main aspects I like about it. It floated on the AIM in 2013 for 115p. It reached all-time highs of 2,750p in November 2019. If I had invested at IPO stage, I would have seen a return of 2,291% at the shares’ highest levels.

As I write, shares are trading for 1,860p per share. At this time last year, shares were trading for 2,140p. This decrease in share price does not worry me. In fact, I see it as an opportunity to buy cheaper shares. The dip is attributed to the pandemic and the lack of new cars being produced in recent times. Economic pressures have also affected the automobile industry. I believe as the economic reopening continues, AB Dynamics could benefit and its share price rise closer to previous highs. 

Reviewing past performance, AB has reported year-on-year revenue and gross profit growth for the past four years. I understand past performance is not a guarantee for the future but I use it as a gauge when researching the best stocks to buy now.

The risks with AB Dynamics are closely linked to the economy, the pandemic, and reopening. If new car production continues to falter, AB Dynamics could see demand for its services reduced. This will affect its performance and financials, as well as investor sentiment, and its share price could suffer.

Overall, I would consider adding AB Dynamics shares to my portfolio right now. The global car industry is experiencing production issues, but I feel this is a short to medium term issue. I invest for the long term. I expect to see AB prosper longer term, offering me a good return.

Best stocks to buy now #2

The next FTSE AIM stock I like is GlobalData (LSE:DATA). Global is a data and analytics consulting firm with a global footprint and reach. Launched in 1999, I would argue it moved into an innovative sector before that sector really took off. After all, data and analytics wasn’t really a prominent concept in 1999, compared to the role data plays in our lives currently.

GlobalData listed on the FTSE AIM back in 2009 for 89p. As I write, shares are trading for 1390p. If I had invested when it was first listed, I would have seen a return of 1,461%! Shares have continued on an upward trajectory since its listing and are currently trading just over pre-crash levels. With a market-cap of over £1.4bn, it could soon join the main FTSE index. It is one of the largest listed firms on the FTSE AIM based on market cap.

There are a few reasons I class GlobalData as one of my best stocks to buy now on the FTSE AIM. Firstly, like AB Dynamics, Global has a good track record of performance. It has seen revenue and gross profit grow year on year for the past four years. In addition to that, it regularly acquires businesses to boost its profile and offering. Acquisitions excite me as a potential investor as it shows willingness to grow, which could increase my returns.

There are risks with GlobalData, however. Competition is rife in the data and analytics sector. There are several well known names that operate in the space, which could affect its market share. These household names could affect performance and in turn, financials too. In addition, acquisitions don’t always work out. Sometimes, firms can overpay for the business they are buying and this can affect the balance sheet and the share price.

Overall, I would add GlobalData shares to my portfolio right now. I expect its growth journey to continue, especially as data and analytics services are in higher demand than ever. 

However, investor sentiment appears to be buoyant due to the potential for graphene’s use in a wide range of applications. This could mean that demand increases significantly in future years, which could boost the company’s profitability.

Of course, there are other growth stocks that have doubled in recent years. One such company that reported on Monday could be a strong performer over the medium term.

High growth

Step forward data and insights specialist GlobalData (LSE: DATA). It reported strong revenue growth across all of its regions, with revenue visibility also improving. The company has been able to strengthen its business infrastructure and commercial scale, while also continuing an acquisition programme that has enabled it to grow in recent years. And with new committed banking facilities of £75m, it appears to have the financial capacity to engage in further M&A activity.

GlobalData also announced that it’s in advanced discussions regarding the potential acquisition of data and analytics provider Research Views. While there’s no certainty that the deal will go through, it shows that the company remains bullish about its future prospects. And having grown revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) by 22% and 14% respectively in the 2017 financial year, it appears to be performing well.

The stock has risen by 140% in the last five years. With its forecast to grow its bottom line by 21% this year, followed by further growth of 20% next year, it appears to be in a strong position to generate further capital growth. As such, now could be the right time to buy while it has a price-to-earnings growth (PEG) ratio of just 1.2.

Risk/reward

Of course, Versarien could continue to post high share price growth over the medium term. Investor appetite for riskier, yet more rewarding shares appears to be high. The recent stock market correction is unlikely to change this stance, which could mean that the company’s valuation continues to rise even though it already trades on supremely high metrics.

Furthermore, there is the potential for success in the trials being run Versarien. Ultimately, it’s not yet known whether graphene can be used in a wide variety of applications but its potential appears to be high. There seems to be a good chance that it will become a more widely-used material over the medium term. As such, for investors who are less risk averse and comfortable with a volatile share price, Versarien could be a worthwhile investment for the long run.