Buying shares in small companies with excellent potential can be an incredibly rewardinglong-term strategy. Holding these kind of shares in an ISA would be even better, since anycapital gains or income wont be taxed.
With this in mind, lets look at three hot growth stocks and ask whether you should make room for them in your portfolio.
Purple patch
Online estate agent Purplebricks (LSE: PURP) announced its first set of annual results this morning. Group revenues were up 448% (18.6m) and gross profits rose by a 427%. The company sold 2.8bn of property in the last 12 months and visits to its website grew to 1.23m by April from 0.4m the previous year.
Muchof Purplebrickss appeal lies in its disruptive business model. In contrast to traditionalagents charging a percentage of a propertys sale value, sellers pay a fixed fee for all marketing and administration. Instead of having its own agents, the company offersa flexible service using Local Property Experts (LPEs) who are able to work any day of the weekand in the evenings. LPErecruitment is now ahead of plan and increased by 159% over the past year.
Although more established players are starting to adapt, Purplebricks is arguablystreets ahead and is now looking to launch in Australia.Unsurprisingly, this advantage (and the potential for massive returns) is factored intothe companys vertigo-inducingvaluation. It could be argued that there is far more chance of itdisappointing shareholders and the market than succeeding. Then again, wasntthe same thing said about ASOS and ARM Holdings?
Time to get serious?
Despite the odd bit of director dealing andupdates about preferred contractors, fertilizer-producer,Sirius Minerals (LSE: SXX)hasnt provided the marketwith much to feed on since the publication of thereport from its defensive feasibility study in March.
This situation could change dramatically with confirmation thatitsharbour facilitieshave been approved and anannouncement relating to the funding of the actual mine. Investors will be focusing onthe AGM on June 24 (yes, the day afterthe EU referendum vote) and hoping for newsfrom CEO, Chris Fraser.
Although a lot of work is clearly going on behind closed doors and theinvestment case has looked morepositive in recent months, lets be clear this is no safe and dependable FTSE 100 stock (for now). Even just the suggestion that the board is strugglingto raisefunding for the mine could see the shares plummet.
As a current shareholder with retirement a few decades away, Im willing to endure the roller-coaster ride ahead. However, Sirius forms only a small part of my diversified ISA portfolio and for good reason.
Giving investors cheer
Before this week,boohoo.com (LSE: BOO) had been making its investors very happy indeed. A strong and sustainedrise in the share pricewas further boosted by last weekstradingupdate. Revenue has jumpedby 41% and overall gross margin isup 56%. The company now has 4.2 million active customers, a 30% increase on last yearandexpects sales growth of 25-30% for the financial year. The 61m cash on its balance sheet isalso encouraging.
Nevertheless, over the past few days, the shares have been highly volatile,perhaps as a result of some profit-taking and pre-referendum nerves. Like Purplebricks, boohoo carries a steepvaluation it has a forecast price-to-earnings (P/E) ratio of 37 so prospective investors will need to think hard about whether current performance can be sustained.
Too hot for some
Investing in fast-growing, dynamic businesses can be extremelyprofitable, especially for investors who are able to spot gaps in the market and buy the shares before the herd arrives. Holding these shares in a tax-free wrapper could lead to even greater gains.
However, this kind of investing is not for everyone. As this week has shown, shares like these can rise or fall by high single digit percentages on some days. So, before addinga slice of Purplebricks, Sirius Minerals,boohoo.com or any youngcompany to your ISA portfolio, it’s vital that you consider your own investing horizons, financial goals, required return and attitude to risk. While the share prices of some young companies can double or triple very quickly, many others struggle to keep going and can lead to heavy losses. Only invest what you’re willing to lose.
That said, if buying fast-growing shares flick your investing switch, you may be interested in a special FREE report written by the experts at the Motley Fool. It highlights atop small-cap sharethey believecouldoffer a potential upside of as much as 50%, despite having already delivered a powerful return for its holders.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended ARM Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
