The top growth shares backed by the world’s best fund managers

Fix the Future has been on the hunt for companies that combine excellent growth credentials with high conviction backing from the world’s best fund managers.

What we’ve found is an eclectic bunch of stocks, which challenge the notion that the tech sector has all the best growth stories.

But before getting on to the results of our screen, how have we gone about it?

Step 1: The hunting ground

One of the most important aspects of our screening Fix the Future database is our starting point: the most popular shares among the world’s best fund managers.

Why is this important?

Every investment approach has its own problems. For growth investors, two key dangers are overpaying for exciting stories and the potential of backing the type of growth that destroys rather than creates shareholder value – growth based on low investment returns that do not justify the cost of the investment in the first place.

Falling into these ‘growth traps’ is made all too easy because many excellent companies grow to justify what can seem ludicrous valuations during the early days. What’s more, as companies achieve scale, they often quickly go from reporting paltry returns on their investment to very impressive ones.

By only looking for growth stocks among the favorite holdings of the world’s best fund managers, we increase our chances of finding stocks that are the real deal. All the stocks we are looking for have been vetted by smart and well-resourced investors.

As with Fix the Future‘s recent value screen, our starting point is the top tenth of the more than 6,500 shares in our database based on the collective conviction in them by all the elite managers we track. You can find out more about how we measure conviction here.

Step 2: The hunt

There are three key things we’re looking for from our growth stocks.

First, we’re screening for strong historical and forecast growth in both sales and earnings per share (EPS). We’re interested in both sales and earnings because while companies can grow EPS by improving margins for some time, ultimately sales growth is needed to support a genuine growth story.

Secondly, our screen looks for strong broker forecast upgrades over the past 12 months. Growth plays are best when they keep surprising on the upside as this should force the market to rebase valuations higher as long as the upgrade has not already been anticipated.

An added value to our upgrade test at a time like now, when profit warnings have become more prevalent, is that it suggests growth expectations are more robust.

Thirdly, we want to see solid share price momentum from stocks. Again, this test has particular relevance at the moment. Many growth stocks became overheated during the lockdowns but as interest rates have gone up, the speculative tide has gone out, and many hot ‘growth’ stocks have been caught without swimsuits.

Not many shares in growth companies have been able to avoid this pullback, but those that have held up reasonably well are more likely to offer something genuinely special to investors.

Another final feature of our screen to note is that we are comparing our pre-vetted list of stocks with each other rather than the constituents of a broad index, such as the MSCI World or S&P 500. This means even when testing if stocks are above average, which is the basis for most tests, we’re setting a higher bar because of the quality of the company.

The tests

Sales and EPS growth:

  • Five-year compound annual growth rate of both sales and EPS above the median average (over 10.2% and 16.5% respectively).
  • Above average sales and EPS growth forecast for the next 12 months (over 10.3% and 12.6% respectively).
  • Above average sales and EPS growth forecast for the following 12 months (over 7.9% and 12.0% respectively).

Forecast upgrade momentum:

  • Upgrades to consensus EPS forecasts for both the next 12 months and following 12-month period must be among the top third of all stocks screened (27.1% and 27.5% respectively)
  • No downgrade to consensus EPS forecasts over the past three months for either the next 12 months or following 12-month period.

Share-price momentum:

  • Shares must have delivered above average price performance over one, three and 12 months (-5.2%, -1.6%, -10.8%).

Step 3: The results

We found 13 stocks that met all our growth criteria.

Only one is a global household name: electric vehicle and software company Tesla (US: TSLA)which Fix the Future recently profiled.

But there are some exciting emerging and regional brands among the picks looking to become global household names of the future. These include drinks companies Celsius (US:CELH) duck Varun Beverages (IN: 540180) and Indian fashion brand owner and retailer Trent (IN:500251).

There is only a spattering of technology stocks on the list. Cyber ​​security company Palo Alto Networks (US:PANW) makes the grade, as does the Chinese semiconductor business Suzhou Maxwell Technologies (CN:300751). Climate technology specialist Enphase Energy (US: ENPH) is another tech-focused pick on the list.

On the whole, the shares are, unsurprisingly expensive. The average forecast price-to-earnings ratio of the 13 stocks is an eye-watering 50 times. However, not all the shares require buyers to pay up. Financial services firm LPL Financial (US:LPLA) is valued at just 15 times the next 12 months’ earnings, despite boasting one of the highest levels of profitability on the list, based on return on capital employed.

A handful of other shares have forecast PEs in the 20s, such as electric infrastructure engineer Quanta Services (US: PWR) duck Willscot Mobile Mini (US: WSC)a company that rents portable storage and flexible workspaces.

The average forecast EPS growth over the next 12 months for these companies is an incredible 54%, while on average their share prices are up 28% over the past year.

Over the coming week, Fix the Future plans to take a closer look at four of these stocks: those offering the highest forecast growth rate, lowest PE, strongest 12-month share price momentum and highest return on capital employed. For now, here’s the full list of the world’s best fund managers’ favorite growth stocks.

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