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Focusing on a company's earnings growth can be a good idea, especially when targeting rising share prices.
Very often, the catalyst behind good share price performance is earnings. Investors want to see an increase in earnings or the expectation of progress in the bottom line in the near future.
Invest to grow
Dividends, on the other hand, may be less important for growth stocks. One well-reasoned school of thought is that companies can often put their excess cash to better use by reinvesting it in operations. That way, the company can generate even greater profits in the future.
It may be advisable to fill a long-term portfolio with both types of stocks. Some of them may point to growing dividend streams and others, expanding earnings.
Recently, I have been considering several London-listed growth stocks. For example, an international online research data and analytics technology company YouGov seems interesting.
City analysts expect the company's profits to grow around 30% in the current business year to July 2024 and the same next year. That's the kind of double-digit progress I look for in a growth-focused company, so YouGov is a good option to consider.
However, I am also running the calculator on an autonomous cybersecurity artificial intelligence (ai) company. dark trail (LSE: DARK). Analysts are once again optimistic about earnings and have forecast increases of more than 40% and almost 35% for the current and next business year.
This business progress is impressive. However, the market is looking good with the developments. With the share price close to 484p (March 15), the forward-looking earnings multiple is approximately 36 for the business year to June 2025.
A quality brand?
Now, I wouldn't let a full price-to-earnings (P/E) ratio deter me from investing in a company's stock if I believed the business had decent growth prospects. In the past, screening out stocks that looked expensive kept me away from some of the market's best performers.
Sometimes a higher rating can be considered a mark of quality. But that said, a higher valuation introduces an additional element of risk for shareholders.
Darktrace just needs to miss its earnings estimates and the market could be brutal in its reassessment of the company's immediate prospects. Not only could the stock price adjust downward to account for lower anticipated earnings, but the P/E itself could decline.
Combined, those two effects can cause a dramatic drop in stock price. It's a scenario that's been seen many times with growth stocks and could lead to a volatile long-term ride for Darktrace shareholders.
One of the “problems” now is that on March 7 the company released an impressive set of half-year results with a positive outlook statement and the stock soared.
Sometimes, however, moves like that can set you back a bit. So I would keep a close eye on Darktrace for the time being with a view to picking up some of the stock on dips and down days. My plan would be to hold the stock for the long term as hopefully further earnings growth occurs in the coming years.
All in all, I think Darktrace looks like an attractive growth company to consider for March and beyond.
