One growth stock I’d snap up and one I’d dump

Christmas gift

If you’re investing in growth stocks, the individual risk makes it more important to diversify your holdings, as even the best ones can get a bit overheated. Today I’m looking at one that I like, and one I’d definitely avoid.

IG Design Group (LSE: IGR), which used to be known as International Greetings, designs and manufactures gift packaging and stationery. And judging by the past few years of sparkling earnings growth, it’s a very profitable business.

We’ve seen earnings per share soar from 7.2p in 2012 to 13.2p in 2016, and the company has just revealed a 38% rise in underlying EPS for the year to March 2017 to 18.2p. That came from a 31% rise in revenue to £311m, which generated a 32% boost for pre-tax profit to £13m.

Dividend back

The dividend was only reinstated in 2015, and this year came in ahead of forecasts at 4.5p per share. On a share price of 337.5p it’s only a yield of 1.3%, but it’s strongly progressive and there seems to be plenty of cash to support forecasts for future rises. IG saw cash generated from operations grow by 52% to £31.5m and ended the year with no debt and cash of £3m.

Chief executive Paul Fineman called it “a year of tremendous progress, with many record outcomes” and seemed ebullient over the firm’s potential — even more than CEOs usually are.

I think IG shareholders have good reason to be optimistic about the future, with forecasts for next year suggesting a further EPS rise of 11% to put the shares on a P/E of around 17 — and I see that as an attractive valuation, even with the shares doubling in the past 12 months.

Off the boil

Shares in Porvair (LSE: PVR), the filtration and separation equipment specialist, had been on a cracking run up until 1 June, having more than doubled since February 2016. 

But it had all the hallmarks of an over-exuberant growth share that’s gone a bit too far, the kind that often fall rapidly as soon as one piece of news comes in that doesn’t beat expectations. Full-year forecasts put the shares on P/E multiples of around 30, with EPS growth set to slow to 5%-7% per year and dividends yielding less than 1%.

That event appears to have happened on Tuesday with the release of first-half results, though they actually look pretty good — showing how fickle the sentiment towards high-flying growth shares can be. The share price dropped 5.3% in morning trading to 540p, down 11% since that peak.

Pre-tax profit grew by 9% to £4.9m, with earnings per share up 11% to 8.3p and the interim dividend lifted by 7% to 1.5p — all of which bodes well for forecasts. 

Ointment, meet fly

One negative snippet is that profits were “held back by start-up losses in China,” and that might have frightened the nervous.

Chief executive Ben Stocks reckons the company “has a strong balance sheet, a promising project pipeline and sees many opportunities for further growth ahead,” and it does seen to be performing admirably to me — its J G Finneran Associates acquisition was said to have performed well and has boosted the company’s presence in the laboratory sector.

But that valuation is just too rich for me, and I’d need to see a fair bit more shaved off the share price before I’d start to see it as attractive — I’d take profits.

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More reading

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Porvair. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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