I like to target growth shares as part of my diversified long-term portfolio. And that means looking for businesses capable of growing their earnings by a meaningful amount year after year.
However, decent growth rarely goes unrecognised by the market. So, valuations tend to be higher for companies with good earnings prospects. But a company’s valuation can be viewed as a mark of quality. And I’d expect to pay more for a business growing its earnings by 50% a year than I’d pay for one growing at 20%.
Software for businesses
One recent purchase I’ve made is Cerillion (LSE: CER). The company provides billing, charging, and customer relationship management software solutions for several industries. Its client sectors include telecommunications, finance, utilities, and transportation.
In May, the company posted a robust set of half-year results. And chief executive Louis Hall said the directors see “excellent opportunities for continuing growth and [that] the new customer sales pipeline has grown significantly”.
City analysts expect earnings to grow by around 30% in the current trading year to September 2022 and by about 19% the following year. But with the share price near 1,059p, the forward-looking earnings multiple is running at just over 31 for 2023. That’s not cheap and the valuation adds a layer of extra risk for investors.
But I’m hopeful Cerillion can keep up its operational momentum for years to come. And a recent major contract win announced in July encourages me to believe the signs are good.
Focused on US healthcare
I’m also holding Craneware (LSE: CRW). The UK-based company develops licensing and ongoing support of computer software for the US healthcare industry.
The company released a strong trading update last week. And chief executive Keith Neilson said he’s looking forward to the future “with confidence”.
Just over a year ago, Craneware acquired a company called Sentry. The addition increased scale and offering of the business. Neilson said around 40% of all US hospitals now use Cranware’s services.
Meanwhile, City analysts predict growth in earnings of just over 9% in the current trading year to June 2023. And with the share price near 1,730p, the forward-looking price-to-earnings rating is around 22. Not cheap. But I reckon Craneware could be developing some decent operational momentum. Time will tell. But this investment is not without risks.
Another recent purchase was Equals (LSE: EQLS). It’s a UK-based fintech payments company. It provides small and medium-sized enterprises with a suite of payments products, such as foreign exchange transactions, prepaid card solutions, faster payments, and accounts for receipts and payments.
In July, the company released a trading update trumpeting “84% growth in revenue and continued strong product uptake”. And chief executive Ian Strafford-Taylor said he believes revenues are “highly inflation-resistant“.
Meanwhile, City analysts predict a meaningful return to positive earnings in 2022 followed by an almost 35% uplift in 2023. Of course, any company can miss its estimates. And one risk is that the business operates in a competitive sector.
However, with the share price near 99p, the forward-looking earnings multiple is around 16 for 2023. And I think that valuation looks fair.
Although there is no guarantee of success, my plan is to hold all three of these stocks for years as the underlying growth stories play out.
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Kevin Godbold has positions in Cerillion, Craneware, and Equals Group plc. The Motley Fool UK has recommended Cerillion and Craneware. 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.