10 great growth stocks at reasonable prices

Investing in fast-growing companies can result in stunning returns. And that's exactly what we've seen in recent months. Since the EU referendum, bullish market conditions have catapulted growth shares, propelling prices and rewarding those prepared to back some of the market's hitherto hidden gems.

Growth investing has long been the hallmark of some of the best-known names in investing. In the US, the likes of Peter Lynch and Philip Fisher made fortunes on the back of the strategy. In the UK, the late Jim Slater and modern day heroes like Robbie Burns have done the same.

But while investing in relatively small, promising, fast-growing companies sounds appealing, there are risks. Growth can stall and unexpected setbacks can emerge. And when that happens to expensively-priced growth stocks, things can get very messy.

Fear of sudden reversals is precisely why many growth strategies take valuation seriously. So-called GARP, or growth-at-a-reasonable price, strategies can offer some protection from over-stretched prices. So it's worth exploring some of the features of what a classic GARP stock should look like, and the sort of strengths that a pro like Robbie Burns would look for.

Rapid and reliable earnings growth

A company's historic profitability and the expectation that its earnings will keep growing is an important factor in any growth investing strategy. Likewise, sales growth and even dividend growth can be a pointer to firms that are not only growing, but are confident that they can keep up the pace.

Modest debt is an important element here. Low or no gearing is highly desirable because debt is one of the biggest killers of small firms that are potentially vulnerable to deteriorating conditions. As a rule of thumb, someone like Burns would insist that net debt is less than three-times operating profit.

Growth at a reasonable price

Growth and value are occasionally seen as being at two ends of the investing spectrum, but GARP investors see thing differently. Typically, this means thinking about how the market is pricing a stock's earnings and profitability outlook. Racy multiples can point to frothy prices, which in turn can be a risk if things go wrong.

So, for a growth investor like Burns, a guide would be to use a price-to-earnings (PE) ratio of 20 as a yardstick. Anything more than that needs investigation. Likewise, he's previously used a price-to-pre-tax profits ratio limit of 15. Again, the idea is to get a feel for when valuations might be stretched.

Positive price trend

A third component of GARP strategies looks at price momentum. Growth investors are almost always focused on stocks that have already caught the imagination of the market - they're not interested in falling prices.

Over the past two years, a strategy tracked by Stockopedia that models Robbie Burns' approach has returned 39.5%. But it has been a consistently strong performing strategy over a much longer period and has seen big surge over the past eight months. Here are some of the companies currently qualifying for it:

Balancing growth, value and momentum like this results in a wide range of potentially interesting growth companies. Most here are in the small-cap space, with OneSavings Bank coming in right at the top end of the range. Marketing services group Communisis leads the list, followed by the likes of building and construction firms Henry Boot, Morgan Sindall and Alumasc, bar operator Revolution Bars and packaging business, Macfarlane.

Strong growth - but watch the risks

Some of the world's most highly-regarded investors have made their names by netting spectacular returns from growth stocks. The current market conditions have shown just how impressively these kinds of shares can perform. Growth investing can be risky, but the sort of GARP approach used by investors like Robbie Burns can offer some protection. A blend of growth, reasonable price and momentum may well help steer away from danger. But there's no doubting it's an appealing strategy that targets what can be the fastest moving companies in the market.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson ofStockopedia.com, the rules-based stockmarket investing website. You canclick here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"