Customer engagement and marketing

As a quick introduction, dotDigital is a marketing and customer engagement business. It provides businesses with tech-based solutions to automate and run marketing campaigns as well as customer engagement solutions to help companies keep in touch with their customer base.

So what’s happening with dotDigital shares currently? Well, as I write, they’re trading for 83p, making it a penny share. At this time last year, the stock was trading for 272p, which is a 69% decline over a 12-month period.

The bull and bear case

So let’s take a look at the bull and bear aspects of dotDigital. I’ll start with some positives.

Firstly, dotDigital operates in a burgeoning market where demand for its services is only increasing. I believe this is due to the rise in e-commerce, online shopping, and digital adoption. As a growth stock option, it could leverage this increased demand into performance and higher returns.

Next, I’m buoyed by some of the strategic partnerships that dotDigital has in place. These include deals with names such as Microsoft, Shopify, Adobe, and a recent agreement signed with McAfee. These partnerships allow it to enhance its offering as well as conferring credibility to products in the tech world, which could boost investor sentiment and performance.

Finally, at the end of July, dotDigital released interim results for the year ended 30 June 2022. Full results are expected in November. The interim results made for good reading, in my opinion. Revenue and recurring revenue increased. Operating profit is set to be ahead of expectations and a dividend is to be announced in the final results too. At present, the dividend yield for dotDigital shares stands at just over 1%. I am aware that dividends can be cancelled, however.

So to the bear case then. I believe that dotDigital shares, performance, and returns could come under pressure due to macroeconomic headwinds. Soaring inflation has caused many businesses to consider cutting costs, and marketing budgets could be slashed.

Next, with the rise of e-commerce and online adoption, competition to provide digital marketing and customer engagement platforms has increased in recent years. All these firms are vying for market share. Any one of dotDigital’s competitors could gain a competitive edge that could hinder its performance and returns.

A growth stock I would buy

To summarise, there is lots to like about dotDigital. I am buoyed by the market it operates in, as well as its great partnerships. Recent trading shows a resilient business model and resilience in the face of headwinds. I am aware of the risks too, however. Overall, I’d happily add a small number of dotDigital shares to my holdings. I believe they will recover in the longer term and boost my portfolio.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

FRP Advisory 

What it does: FRP helps businesses in economic trouble by providing advice on restructuring, debt and pensions.

By Royston Wild. Finding solid growth stocks to buy is becoming increasing challenging for UK investors. Inflation is soaring and economic growth is stalling, putting corporate profit forecasts under increasing strain. 

But FRP Advisory Group (LSE: FRP) is a stock that’s set to benefit from these deteriorating conditions. The business provides a range of advisory services to companies in financial distress, the number of which is soaring in Britain. Higher interest rates mean that businesses are struggling to pay their debts.

According to tax, audit and advisory firm Mazars Accountants, the number of corporate insolvencies has rocketed 70% over the past year, to 19,191. Unfortunately it has warned, too, that “the dismal outlook means more pain for businesses is likely.” 

FRP’s share price has slumped more recently. This is because of rising costs that caused profits to fall in its latest financial year (to April 2022). 

I consider this to be a great dip buying opportunity and expect FRP’s shares to bounce back as trading activity gathers momentum. Revenues at FRP leapt 21% year-on-year in fiscal 2022, and rose 11% on an organic basis. 

Royston Wild does not own shares in FRP Advisory. 

Kainos

What it does: Kainos is a technology company that helps public and private organisations with digital transformation.

By Edward Sheldon, CFA. Kainos (LSE: KNOS) shares have experienced a significant pullback this year as growth shares have fallen out of favour and I think this has created a compelling investment opportunity.

Kainos is benefitting as companies and government organisations embrace technology and this is reflected in the group’s financial performance. Last financial year (ended 31 March 2022), revenue was up 29%. Meanwhile, at the end of the period, the group’s contracted backlog was £260m – up 26% year on year.

Looking ahead, I’m confident that Kainos will continue to grow at a healthy rate. That’s because digital transformation can help organisations lower costs and beat inflation. It’s worth noting that CEO Brendan Mooney recently said that demand for the company’s services has “never been higher”.

Now, this growth stock isn’t cheap. Currently, its P/E ratio is in the high 20s. This adds risk to the investment case. However, I believe that long-term investors in the company, like myself, will be rewarded over time.

Edward Sheldon owns shares in Kainos

dotDigital

What it does: dotDigital is a SaaS company providing an omnichannel marketing automation and customer engagement platform.

By Zaven Boyrazian. The technology sector hasn’t had much love in 2022. Yet, despite the volatility, there remain plenty of attractive opportunities for my portfolio. One that’s caught my attention at the moment is dotDigital (LSE:DOTD).

With the tailwinds from the pandemic slowing down, top-line growth followed suit, upsetting quite a few momentum investors. Yet even without these catalysts, revenue continues to expand at a respectable rate. Meanwhile, its latest trading update showed a 16.8% jump in average revenue per customer.

In other words, clients are spending more money on the firm’s marketing platform. And even with an uncertain economic outlook, marketing email volumes are up 22% to 29.4 billion versus a year ago. This all bodes well for the company, especially given its fierce competition from alternative platforms.

Pairing this with a seemingly cheap valuation makes dotDigital look like an excellent growth addition to my portfolio this month.

Zaven Boyrazian owns shares in dotDigital.

Domino’s Pizza

What it does: Domino’s is a UK-based pizza delivery company and FTSE 250 constituent.

By Paul Summers: At the time of writing, shares in Domino’s Pizza (LSE: DOM) are down by over a third in 2022. That’s not entirely surprising. The squeeze on discretionary income was never likely to be good news for the firm. 

For a long-term growth investor like me, however, this is looking like an opportunity to acquire the stock at a cheaper-than-usual valuation. A forecast price-to-earnings (P/E) ratio of 14 for the current year is below the 5-year average of 16. There’s also a 3.5% dividend yield to reinvest while I wait.

I’m not expecting a rip-roaring recovery in earnings over the next year or so. Nonetheless, decent interim numbers at the beginning of August coupled with encouraging news on the search for a new CEO could herald a change in market sentiment.

Paul Summers does not own shares in Domino’s Pizza.

Safestore

What it does: Safestore is a leading provider of self-storage facilities in the UK and Continental Europe

By Christopher Ruane. I continue to see value in Safestore (LSE: SAFE). Its shares are down 20% since April, although they are still 7% ahead of where they were this time last year.

In the first half, revenue grew 15% compared to the same period last year, diluted earnings were up 67%, operating cash inflows grew 25% and the dividend also grew 25%.

That is excellent growth – and I expect more of the same in future. Self-storage remains a fairly undeveloped industry in the UK compared to the US, for example. I see lots of space for growth. Safestore’s strong brand and proven operating model could help it capitalise on that. One risk I see is competitors trying to woo customers with low prices, pushing down profit margins across the industry.

But I think Safestore has a great, simple formula in a market with strong long-term growth prospects.

Christopher Ruane owns shares in Safestore.

CMC Markets

What it does: CMC Markets specialises in online trading, providing exposure to a range of different asset classes. It has a global presence.

By Andrew Woods. A glance at the historical earnings data for CMC Markets (LSE:CMCX) immediately indicates rapid growth over the past five years. For the year ended March, between 2018 and 2022, earnings per share (EPS) rose from 17.3p to 24.8p.

By my calculations, this results in a compound annual EPS growth rate of 7.5%. For me, I find this attractive in a growth stock. Over that time period, revenue also grew from £209m to £325m.

It’s quite clear that the firm benefited from increased trading activity during the pandemic. As customers enjoyed greater disposable income and had more time to devote to investing, the business saw its profit surge. What’s more, greater volatility in the stock market enabled the firm to derive more income from price spreads.

However, revenue fell by around £100m between 2021 and 2022, suggesting that customer interest and activity may have declined following the pandemic. Nevertheless, revenue and pre-tax profit are still higher than pre-pandemic figures.  

Andrew Woods has no position in CMC Markets.

Chocolate heaven

The shares in Hotel Chocolat (LSE:HOTC) have fallen 63% in the past year, while in the last month they’re down 54%. At the time of writing, they’re trading at 138p.

Prior to the pandemic, the up-market chocolate company reported consistent growth in pre-tax profit. 

As we can see, the firm posted a pre-tax loss of £7.45m for the year ended June 2020. This was chiefly a result of the closure of shops during the pandemic. It’s now battling more current issues, like wage inflation and potential price rises in raw materials used as ingredients.

However, the business largely has control over its own supply chain, producing its own cocoa from trees it grows in St. Lucia, in the Caribbean. This could give the company a tactical advantage over competitors who may face supply chain issues.

In results released last week, however, the business stated that it was concerned because of rising costs and wage inflation. Despite this, it posted a 37% higher revenue for the year ended June 2022. What’s more, it’s financially stable with a cash balance of £17m. 

Growing software

dotDigital (LSE:DOTD) has similarly seen its share price plunge recently. In the past year, it’s down 69%, while over the last three months it’s fallen 9%. At the moment, the shares are trading at 92.4p.

The marketing software platform released its results for the year ended June in the past week. Revenue was in line with previous guidance, with a final figure of £62.8m. This was higher than the previous year, which was £58.1m.

Furthermore, average revenue per customer was up 17%, year on year, while 94% was recurring revenue. This was an improvement from 2021, when this figure stood at 93%.

The business did, however, highlight the uncertainty within the broader economic environment. There is the risk, for instance, that the firm loses customers who can no longer afford its services.

On the other hand, the company signed a deal in March with online security giant McAfee. This will last for at least two years and could give dotDigital an opportunity to expand its clientele on a global scale.

Overall, these two growth stocks have seen their share prices fall dramatically over the past year. I think there’s a good chance that the market will recover in the long run and that this could be an ideal time for me to pick up the shares at low levels. I will add these two firms to my portfolio soon.

I’ve now found two more that I’m considering adding to my portfolio with a spare £1,000. Let’s take a closer look. 

Impressive earnings growth

The share price of dotDigital (LSE:DOTD) has plummeted 68% over the past year, having fallen 16% in the last three months. Currently trading at 77.4p, it’s in prime penny stock territory.

The firm – a software platform provider for the marketing industry – has enjoyed stellar earnings growth over the past five years. 

Between 2017 and 2021, earnings per share (EPS) rose from 2.47p to 4.12p. By my calculation, this means that the business has a compound annual EPS growth rate of 10.8%. The AIM 100 index firm has clearly been growing profits at a fast pace over that time period.

For the year ended June, between 2020 and 2021, pre-tax profit was pretty flat, with a slight increase of £600k. 

The business has also recently signed a two-year deal with online security giant Adobe. This has the potential to promote dotDigital’s brand over the next couple of years. 

There is, however, the risk of a slowdown in the software-as-a-service (SaaS) sector following heightened demand during the pandemic. This may be compounded by the pressures of rampant inflation.

Consistently profitable

I’m also attracted to Pan African Resources (LSE:PAF) for its impressive earnings growth. It currently trades at 19.78p.

Between 2017 and 2021, EPS increased from 2.6p to 3.87p. This results in a compound annual EPS growth rate of 8.3%. 

For the year ended June, between 2017 and 2021, the company’s pre-tax profits also grew from £44.9m to £104.8m. While past performance is not necessarily indicative of future performance, these figures suggest that the business has been, and may continue to be, consistently profitable.

In April, the firm – a gold miner operating in South Africa – initiated a share buyback scheme worth £2.6m. While this may seem small, it’s still encouraging to see an AIM 100 stock embarking on such a plan. It’s yet another indicator that Pan African Resources is in a good financial state.

The company is commencing further drilling at its flagship Barberton Mine in South Africa, while starting exploration activities in Sudan.

There is always the risk, however, that future pandemic variants halt mining operations. 

Overall, these two firms have displayed strong and consistent earnings growth over the past five years. While there are risks, I will be using my £1,000 to add both businesses to my portfolio to hold for the long term. 

Penny stock #1: EnQuest

As an oil and gas producer, EnQuest (LSE:ENQ) operates primarily in the North Sea and Malaysia. Currently trading at 36.05p, it is in prime penny stock territory.

Looking at recent results, the company managed to turn a $565m pre-tax loss into a $352m pre-tax profit between 2020 and 2021.

In addition, the firm’s free cash flow over the same period grew from $210m to around $400m. 

Despite this, production fell from 59,000 barrels of oil per day (bopd) to 44,000 bopd. This is something I would like to see improve in the near future as the oil price continues to be strong.

However, the firm is making efforts to increase output, having recently purchased the Golden Eagle and Bentley fields off the coast of Aberdeen and Shetland, respectively. 

Penny stock #2: dotDigital

A digital marketing and software services business, dotDigital (LSE:DOTD) has a strong financial record. It currently trades at 86.6p.  

For the year ended June, between 2017 and 2021, earnings-per-share (EPS) increased from 2.47p to 4.12p. By my calculation, this means the company has a compound annual EPS growth rate of around 10.88%. This is strong and consistent.

What’s more, it recently signed a two-year deal with software security giant Adobe, that will improve the visibility of dotDigital’s products around the world.

For the six months to 31 December 2021, organic growth in revenue increased by 10%. Its leadership, however, lowered growth expectations for 2022 as it forecast a decline in demand after the pandemic. 

Penny stock #3: Eurasia Mining

My final pick is Eurasia Mining (LSE:EUA), a firm specialising in platinum group metals (PGMs), gold, cobalt, nickel and copper. At the present time, it operates solely in Russia. It currently trades at 9.5p. 

It is currently benefiting from higher metal prices as the world recovers from the pandemic and deals with the war in Ukraine.

In addition, there has been significant interest in its metal assets. In February, the business announced that an unnamed buyer was in advanced stages of a deal to purchase “substantially all” of Eurasia Mining’s assets.

The firm has also so far avoided Western sanctions on Russian companies and individuals. Given the uncertainty of the situation, however, I would always factor this big potential risk into my investment decision.

Overall, these are three strong penny stocks. Although they constitute greater investment risk, I think their track records justify adding them to my long-term portfolio. I will be buying shares in all three during May.

Cheap FTSE 100 penny stock

Broadcaster ITV (LSE: ITV) has seen its market-cap tumble almost 30% year-to-date. Based purely on this, investors might suspect that trading has been awful. However, this simply isn’t the case. The £3.4bn-cap recently revealed a 48% jump in pre-tax profit and 24% rise in total external revenue growth of 24% in 2021. On top of this, the company kept its word and reinstated the dividend.

So what’s got investors flustered? It all seems down to the company’s plan to “supercharge” its streaming services and launch ITVX. As interesting a development as this is, it will require an awful lot of cash to get going. In addition to the cost, some investors are clearly sceptical of ITV’s ability to challenge established giants such as Netflix or Amazon. 

Valid concerns as these are, I believe the market is probably being too pessimistic. ITV still boasts an impressive list of popular productions. Debt is also coming down and a total dividend of 5.71p per share has been estimated for FY22. That’s a chunky yield of 6.81%, easily covered by profit. All this for a penny stock now trading at just six times earnings.

So as bad as the last few weeks have been, I’d be comfortable buying a slice of ITV today, just as I was before this month’s update. 

50% down! 

Another penny stock I’d consider is dotDigital (LSE: DOTD). It provides solutions to other businesses for automating their marketing campaigns across social media and email.

Despite the clear demand for what it does, holders have endured a torrid time of late. The shares have halved in value since the beginning of 2022. What’s brought on this capitulation?

Well, investors’ growing aversion to growth stocks in recent months can’t have helped. Nor can more recent news that full-year revenue growth will now be lower than expected “during the current and future financial years“.

Nonetheless, dotDigital looks like a fundamentally good business to me and possesses many of the qualities I look for. Margins are pretty high. Returns on capital — essentially, what a company gets back for the money it puts in — have been consistently decent too.

Recurring revenue also now stands at 94%, giving the company good visibility on trading. If CEO Milan Patel is right and the “dramatic acceleration” in the adoption of digital marketing is “set to endure,” DOTD might prove a great buy at these levels.

Risks to consider

Cautiously bullish though I am, there’s nothing to say things won’t get worse before they get better for either penny stock. The awful conflict in Eastern Europe may continue impacting general market sentiment, dragging the share prices of both companies lower.

dotDigital might be particularly at risk here. A forecast P/E of 23 still looks punchy considering the amount of competition it faces. ITV shares could also sink lower if, for example, advertising revenue dips again. 

However, the time to buy shares is when the expectations are (temporarily) low. I think that might be the case here. With a bit of patience, I reckon these penny stocks can still deliver. 

So, let’s explore three UK shares I think are great buys for my Stocks and Shares ISA £20,000 allowance.

A future leader in digital marketing?

dotDigital (LSE:DOTD) is one of many UK shares I’m keen to buy now. The group provides a cloud-based marketing automation platform. Clients can create and distribute targeted marketing campaigns to existing and prospective customers to boost product sales or service subscriptions.

The stock has taken quite the beating over the last 12 months, falling by around 18%. Yet despite this lacklustre performance, revenues hit a new all-time high and continue to surge annually by double-digits.

This is far from a risk-free business, of course. With scrutiny surrounding data privacy from governments, and companies like Apple limiting data gathering systems, dotDigital’s platform may start losing its data-driven edge.

However, with a track record of successfully adapting to such restrictions in the past, such as GDPR, I believe the company can do so again.

One of the best UK shares to buy now?

Judges Scientific (LSE:JDG) shares have experienced quite a tumble in recent months. While the stock is still up by around 9% in a year, since the start of 2022, it’s actually down by nearly 15%.

This business is a designer and manufacturer of scientific instruments used throughout countless industries and applications, from testing electric car batteries to running experiments at CERN.

While it’s undoubtedly quite a niche field, the group’s impressive track record of acquisitions has made it arguably a leader within its space. And excluding 2020, profits have been growing by an average of 66% annually since 2017!

But like all businesses, there are risks. With many of its customers being supported by government subsidies, budgets are largely at the mercy of local economic health. Needless to say, the pandemic hasn’t exactly created the best environment for that.

Future economic downturns will remain an ever-present threat to this business. But with an established portfolio of brands, I remain confident that Judges Scientific is one of the best UK shares to buy now for my Stocks and Shares ISA.

Becoming Amazon’s landlord

With e-commerce adoption being accelerated courtesy of global lockdowns, the demand for high-quality well-connected warehouse space has skyrocketed. That’s proven to be quite a favourable tailwind for Warehouse REIT (LSE:WHR), and it’s why it’s one of my best UK shares to buy for my portfolio.

The business model is pretty simple. It buys dilapidated well-positioned properties, spruces them up, and then rents them out at a higher price to e-commerce businesses like Amazon. The profits are then returned to shareholders through a sizeable 4% dividend yield.

It does face some serious competition. And with relatively low barriers to entry, competitors could start heating up bidding wars for new locations. But given its consistent track record of performance, I think this stock could be an excellent addition to my portfolio.

Digital marketing

dotDigital provides cloud-based marketing solutions that allow businesses to automate their advertising and marketing campaigns. This is by sending tailored content across a multitude of channels such as social media, email, and text messages. The changing face of retail and rise of e-commerce has meant there is lots of demand for such services. 

As I write, the dotDigital share price is trading for 140p. At this time last year, the shares were trading for 190, which is a 26% drop over a 12-month period. The shares have lost 50% since September 1, when the shares were trading for 291p. 

FTSE stocks have risks

Macroeconomic uncertainty and a stock market correction have led to a sell-off in tech stocks and stocks in growth markets. Although I believe this is a temporary issue, no one can predict how long this issue could last and how far certain shares could drop. A significant share price drop for dotDigital in recent months could continue in the short to medium term, in my opinion.

The tech sector is extremely competitive and many firms are vying for market share and overall market dominance. With the rise in e-commerce and the need for digital marketing, dotDigital could see its performance, growth, and returns affected by competitors in its space. Furthermore, shares are currently trading with a price-to-earnings ratio of 38, which could still be considered expensive. There is also the chance that growth is already priced into the higher share price.

Why I like DOTD shares

My investing mantra has always been to invest for the long term. Despite the current bearish attitude in the market when it comes to growth stocks, I am always on the lookout for the best FTSE growth stocks in burgeoning markets. I believe dotDigital could grow in the coming years from the rising demand for digital marketing services. It currently possesses some lucrative strategic partnerships with leading tech names such Shopify, Adobe, and Microsoft Dynamics. I believe these partnerships will help attract new business and boost growth in the longer term.

dotDigital also has a good track record of performance. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see revenue and gross profit have increased year on year for the past four years. Coming up to date, the company released an interim report at the end of January for the six months ended 31 December 2021. Recurring revenue increased by 22% compared to the same period last year and overall revenue increased by 10%. Cash generation increased and full-year guidance is currently expected to be met.

FTSE stocks that make me a passive income through dividend payments are firmly on my radar, especially those in a growth market, like dotDigital. I do understand dividend payments can be cancelled, however. At current levels, DOTD’s yield is just under 1%.

Overall, I like dotDigital shares and I’d happily add them to my holdings at current levels. The stock market correction has made them cheaper, presenting an opportunity for me. I’d expect the shares to eventually head back on an upwards trajectory as economic uncertainty fades, although this could take some time.

Market corrections like this one can offer excellent buying opportunities for my portfolio. And I’m following the wisdom of legendary investor Warren Buffett to “be fearful when others are greedy, and greedy when others are fearful”.

With that in mind, let’s explore two UK growth shares from my portfolio that I think have been oversold by panicking investors. I’d like to buy more of both.

A fintech disrupting corporate banking

Alpha FX (LSE:AFX) provides two main solutions to small and medium-sized businesses. The first is a currency risk management service. And the second is a suite of alternative banking tools, including the capability of completing international enterprise-scale transactions significantly faster and cheaper than traditional methods.

Over the last 12 months, this growth share has actually climbed by an impressive 30%. That certainly doesn’t sound like a stock in distress. But since the start of 2022 it’s down by almost 20% following its latest trading update.

Despite what the downward trajectory suggests, the report was actually quite encouraging, in my opinion. Revenue for 2021 is expected to come in ahead of analyst expectations at £77m – a 67% year-on-year jump. What’s more, this rapid growth has offset the expected margin pressures from increased hiring and newly acquired office space.

To me, this looks like a growth share caught in the crossfire of the current market environment. But I will admit, its valuation remains fairly lofty with a price-to-earnings ratio of 39. That could open the door to further volatility. However, given the consistent performance delivered by management so far, this is a risk I’m willing to take.

A growth share in the digital marketing space

Unlike Alpha FX, dotDigital‘s (LSE:DOTD) 12-month performance hasn’t been as pleasant. In fact, the growth share is down more than 20% over the last year. As a reminder, this company provides a cloud-based data-driven marketing platform from which companies can automate their advertising campaigns to maximise sales.

With so many new e-commerce businesses popping up, courtesy of the pandemic, demand for dotDigital’s solution seems to be skyrocketing. At least, that’s what the latest trading update would suggest, despite the lacklustre share price performance.

Going into the numbers, average revenue per customer (ARPC) increased by 19% during the second half of 2021, reaching £1,422 per month. And in turn, this pushed total half-year revenue up by 10% to £30.9m.

In my experience, when a business delivers solid results, and the share price falls, it’s usually a great buying opportunity. However, it’s not a risk-free endeavour. Scrutiny and regulations surrounding data privacy are mounting. Apple has already implemented data gathering restrictions on all devices running iOS 14. And given that dotDigital’s platform is built around analysing user data, it could create complications.

But this isn’t the first time restrictions on data gathering were implemented. And since the company was able to promptly adapt to the introduction of GDPR, I remain confident it can do the same again. That’s why I see the latest tumble in this growth share as a buying opportunity for my portfolio.

Warren Buffett’s compounding growth

In 1999, a shareholder asked Buffett how he achieved such staggering wealth. He said, “Start early … I started building this little snowball at the top of a very long hill. The trick to have a very long hill is either starting very young or living to be very old.” For Warren Buffett, therefore, time is the greatest barrier to amassing a fortune. 

This is because we can usually only see the power of compounding growth over a relatively long period. It might be surprising, but Buffett acquired 99% of his $100bn after the age of 50 years old. 

So, how do we go about calculating compounding growth? It may be achieved through this formula: 

(V_final/V_begin)^1/t − 1, where V = value and t = time

Breaking this down, we may have a set of data like earnings per share (EPS), that begins in 2017 at 1.3p and ends in 2021 at 4.5p. The ‘final value’ is 4.5p and the ‘begin value’ in 1.3p. Dividing these gives us 3.46. The time period is five years, so t = 5. We therefore calculate 3.46^(1/5), which equals 1.28. Finally, 1.28 − 1 = 0.28, so our compounding annual growth rate of this set of EPS is 28%.

Some of Warren Buffett’s biggest holdings, like McDonald’s, exhibit consistent growth in this way. It is therefore a key part of his investing strategy.

2 FTSE AIM stocks that fit the bill

I’ve found two FTSE AIM shares that have consistent earnings growth based on Warren Buffett’s technique. The first, Atalaya Mining (LSE: ATYM), is a copper mining company operating in Spain. Using the formula above, I have calculated its earnings growth over the five calendar years from 2016 to 2020 as 14.4%. 

What’s more, the company is using the profits that it keeps, the ‘retained earnings’, for further expansion. For instance, it is building a new industrial plant to create more efficient mining of copper and reduce its carbon footprint. Just last month, however, it stated that the budget may need to be revised if gas prices stay as high as they are.

The second stock is dotDigital Group (LSE: DOTD), a software marketing automation platform. As per the calculation, for the period between the years ended 30 June 2017 and 2021, this company boasts a compounding annual growth rate of 10.8% for its EPS. Again, this is strong, consistent, and adheres to Warren Buffett’s principle.

Although Canaccord recently downgraded the shares based on apparent “slowing momentum”, retained earnings are being directed towards research and development. This has resulted in a 22% increase in revenue from better product functionality, as recorded in a trading update for the six months to 31 December 2021.

Strong earnings growth and the competent deployment of retained earnings are important to Warren Buffett. These techniques give me a good chance of obtaining consistent growth over the long term. I will be buying both Atalaya Mining and dotDigital now.