There are many different approaches used by investors in selecting stocks for a portfolio. One factor many investors look for is companies that they expect will grow their earnings per share (EPS) at a rate faster than the average.
An advantage of focusing one's search on fast-growing companies is that they have a habit of being 're-rated' if at the time they are undiscovered by the wider investing community and also enjoy the wind at their back in terms of share price appreciation.
The catch is that often fast-growing companies attract expensive valuations, which adds risk to an investment. A recent example of a high-priced stock that failed to meet market expectations is education provider Navitas (ASX: NVT). Despite confirming reasonable growth for this financial year, it wasn't high enough to please the market and justify the high stock price; consequently a sharp 5% fall in the share price occurred.
Growth at a reasonable price (GARP) is often used to describe an investment thesis that focuses on identifying growth stocks but not 'overpaying' for that growth. Here are four companies that operate in the consumer discretionary sector and based on CommSec's consensus figures, are expected to grow EPS at impressive rates and could be worth further investigation.
1. Domino's Pizza (ASX: DMP) is forecast to increase EPS from 39.5 cents per share (cps) to 51.6 cps, which represents an increase of 30.6%.
2. Cash Converters (ASX: CCV) is forecast to increase EPS from 7.9 cps to 10.2 cps, which represents an increase of 29%.
3. Super Retail Group (ASX: SUL) is forecast to increase EPS from 57.6 cps to 67.1 cps, which represents an increase of 16.5%.
4. The Reject Shop (ASX: TRS) is forecast to increase EPS from 73.6 cps to 89 cps, which represents an increase of 21%.
Foolish takeaway
It must be stressed again that identifying growth stocks is only part of the investment process. It is also critically important to determine a reasonable price to pay for that growth and of course ideally but the company at a significant discount to that valuation.
