Image source: Getty Images
Warren Buffett attributes the success of his Coca-cola and American Express investments to the fact that companies have grown, not to the dividends they have paid. In other words: Growth stocks can be great.
The problem is that many companies need time to increase their profits. And I think some of the best growth stocks should only be considered by investors with a long-term focus.
Halma
During the last 12 months, Halma (LSE:HLMA) shares are up 27%. It's a great performance, but I don't think investors should bet on something similar happening again in 2025.
The stock is currently trading at a price-to-earnings (P/E) ratio of 36 (or 31 based on the company's adjusted numbers). And the company does not NVIDIA – It is not likely to double its profits next year.
However, I think its long-term prospects are enough to justify the current share price. Halma's strategy involves buying other businesses and integrating them into its network.
Typical acquisition targets occupy dominant positions in niche markets, making them difficult to disrupt. But it may also mean that its room for growth is limited and this is a risk given the high share price.
Halma can generate some growth by integrating subsidiaries into its ecosystem. Ultimately, however, the success of the business will depend on the company finding enough companies to buy.
Management reported a strong acquisition pipeline in the company's latest trading update. I think stocks could prove to be a great investment, but it won't happen overnight.
Palantir
Palantir (NASDAQ:PLTR) is a very different case. I think there's a good chance the company's earnings will double over the next 12 months, but with a P/E ratio of 345, the stock will look expensive even if it does.
Historically, the company has relied heavily on government contracts. And since these continue to represent a large portion of revenue, there is a constant risk of policy changes and budget modifications.
However, Palantir has recently shifted its focus to companies to sell to, and early signs are encouraging. It seems like companies can't sign up fast enough when they see what Palantir can do.
Whether it's bottled water or agricultural software, the company's analytics products seem capable of generating impressive insights for its customers. And I think this is very promising.
There is a lot of optimism about what artificial intelligence (ai) could mean for various companies. But Palantir is one of the few companies that actually has a working ai product that produces real results.
It will be a long time before the company is in a position to return cash to shareholders in a way that equates to a good return on the current share price. However, I think patience could pay off.
Long term investment
Unless they fall sharply, neither Halma nor Palantir shares will look cheap in the coming years. And while anything can happen, I don't think investors should look for a return at that point.
However, in the long term both companies have excellent growth prospects. There are risks in both cases, but I think either stock could prove to be a great investment at current prices.
