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2 growth stocks to buy and 1 to avoid

Growth, Growth, Growth.

That’s the mantra of successful investing. That’s because all long-term investing is based on earning a little more each year.

Fast growers can give portfolios a great boost, but they can get overheated, too. When market expectations run hot, the share price can be bid up and priced to perfection. Any little slip up or disappointment could send a market darling into a tailspin.

For example, I would avoid Sirtex Medical Limited (ASX: SRX) for now. That isn’t because of the business, since it is already successfully growing. However, the share price is just too high for my liking, based on the price-earnings ratio of 52.

The stock is flying up on the anticipation that the company’s liver cancer treatment product may become a first-line cancer treatment used on liver cancer patients in the US, based on expected clinical trial results due out next year. The stock has soared, but investors could sell out quickly on any bad news, or take quick profits on good news as well.

I would definitely have this one in your watchlist because the business prospects are very good, but when buying stocks, you must always have a margin of safety in the price just in case something happens. I don’t think there is much at these price levels.

Here are 2 growth stocks I am looking at.

—  REA Group Limited (ASX: REA) is the operator of realestate.com.au, the number one website for property searches. A fast grower for a number of years, recently its price-earnings ratio is more in line with expected growth. That means investors have to pay a smaller premium for strong growth.

Its business will begin expanding into the huge U.S. real estate market after it bought a 20% stake in Move Inc. (NASDAQ: MOVE), the third largest property search website in the US. Together with News Corp (NASDAQ: NWS), which will own 80% of the company, it can start taking market share in a highly fragmented property listing and advertising industry.

—  Another solid grower is Ramsay Health Care Limited (ASX: RHC), the largest private hospital operator in Australia. After a series of acquisitions, it will become the leading operator of private hospitals in France as well. The company has a good track record for consistent growth.

Next stop is Asia. The company just announced that it entered a joint venture to operate five hospitals in China for the first time. The hospitals are in Chengdu, the capital of Sichuan province. This will be the first step for further opportunities for Ramsay Health Care to expand into a potentially huge healthcare market. With millions of Chinese moving to urban areas over the next 15 – 20 years, healthcare will be a strong growth industry.

5 stocks under $5

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*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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