2 mid-cap growth shares to feed your portfolio

Investing purely on a “theme” can be dangerous, as it can obscure the specific conditions that affect a particular company. However, pairing up thematic investing with a business that has strong prospects is a proven strategy for picking winners.

In this case, the two companies on this list give an investor exposure to a stable investing theme: food provision and service. Each has a strategy that could see it grow its revenue and profits in the medium term, and each benefits from a slightly different secondary tailwind.

Helping along green shoots

Nufarm Limited (ASX: NUF) is both a producer and distributor of crop-fertilisation and protection products. Research looking back at the development of advanced economies shows that one of the fundamental building blocks is the increased productivity of the agricultural sector.

Increased agricultural efficiency increases food yield, reduces prices and reduces the need for additional labour, meaning workers can be released to higher value-add sectors. For this reason, Nufarm is one of the best exposures to emerging market economies, as these countries seek to increase the yield for every square metre of farmland.

This is especially important for countries where arable land is limited, and populations are increasing rapidly, as is the case in much of south east Asia and Africa.

Nufarm has forecast earnings growth of high-single digits to low-double digits, which is a significant upgrade considering the previous forecast was for nil growth. A risk to this forecast, and for Nufarm more generally, is its exposure to sometimes volatile emerging economies. For example, parts of South America represent significant revenue for the company, and geopolitical unrest there can impact earnings significantly.

Cash from cappuccinos

It’s often said that the fastest way to torch a large pile of money is to open a café. The low barriers to entry, high competition in every capital city and increasing wage costs create a perfect storm of tough conditions for café operators.

But Silver Chef Limited (ASX: SIV) has found a way to help these business owners lower their capital costs and also carve out a profitable business niche for itself in the process.

Put simply, Silver Chef allows new cafes, restaurants and other hospitality businesses to lease whatever they need for their business, rather than pay a high price by purchasing outright. The company has a wide inventory of stock, from kitchen staples to deep fryers and shop floor furnishings like chairs and tables.

The most recent earnings report was pleasing with the company consolidating gains made over the past year by announcing 21% revenue growth, with even better profit growth of 45%.

Silver Chef is also exposed to the tailwind of business formation and increased leisure spending. As the economy transitions away from mining and towards hospitality and tourism, Silver Chef is positioned to capture new café spending as well as existing establishments upgrading their fittings and equipment.

The company has also expanded into Canada in recent years, a market which has many similarities to our own. Risks for Silver Chef include a rise in its borrowing costs, which would compress margins if it could not pass those costs on to customers, as well as risk that its Canadian operation does not perform to expectations and distracts management from its core offering at home.

Foolish takeaway

Pairing up a macro investment theme with strong growth prospects is a good way to identify future winners, and Nufarm and Silver Chef may be two of those. Nufarm is a longer term story, while investors in Silver Chef should be able to see whether the expansion strategy is paying off in a shorter time frame.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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