Best growth stocks to watch

What is a growth stock?

A growth stock refers to a company that is expected to see its financial performance and share price outperform the wider market. They tend to be smaller stocks or startups that are gaining momentum in disrupting their industry and often boast a unique selling point.

Pros and cons: why invest in growth stocks?

The investment case for growth stocks mostly boils down to one thing: share price appreciation. As suggested in the name, these stocks are focused on growing and this means they are reinvesting any money that they are making. It is rare for a growth stock to pay a dividend (but there are still plenty), and it is common for them to be burning through cash and be unprofitable.

The lack of dividends means many growth stocks are unsuitable for income investors that target steady and established companies with generous and reliable payouts.

Growth vs value stocks: which have the highest returns?

The size and potential of growth stocks mean share prices can be extremely sensitive. One contract or announcement can make or break a company. For example, a pharmaceutical growth stock can see its share price skyrocket if its new drug wins approval from regulators, or plummet to zero if trials don’t go well and it has nothing else to fall back on.

Ultimately, growth stocks are geared to head higher, but they are generally more vulnerable. Those investing in growth stocks have confidence in the company’s prospects and valuation, but it is twice as easy to lose value as it is to gain it in the first place. The potential rewards can be huge for growth stocks, but so can the risks.

How to identify and pick growth stocks

Although most growth stocks are small or fledging companies, they can also be large market leaders. Take Amazon as an example. It is the largest cloud-computing company in the world and the first name to be mentioned when discussing ecommerce, but the company does not pay a dividend and reinvests all of its money because it is still chasing growth.

Amazon is in the top five most valuable publicly-listed business in the world, worth $1.9 trillion, but the company is still expanding and diversifying into new areas and its share price continues to find higher ground. Even someone who made an investment in Amazon as recently as a year or two ago may have made substantial sums.

Still, all growth stocks share some characteristics regardless of their size. The first is an ability to report financial results that are significantly better than established peers. If the UK banking industry saw average growth in profits of 2% but a smaller challenger bank reported 10% growth, then this would suggest it is outperforming the wider market.

The second feature of a growth stock is that it has faster growth in share price than peers and rivals. For context, the 239% increase in Nvidia shares in 2023 compares favourably to the 43% rise in the Nasdaq Composite.

The third characteristic is that the stocks are poised for growth with a clear catalyst in the making. Take a junior mining company that is building a new gold project. Construction is expensive and it can’t make any income until after it is built, but once the mine is finished, then the valuation and investment case for that company completely changes.

Investors often put large discounts on these types of companies, but these can melt away once they have delivered and are generating income. Many investors look for companies that are set to reach key milestones in the near future. These types of shares can be high risk, however.

How to trade and invest in growth stocks

Decide whether you want to invest in shares or trade them. If you invest, then you buy the shares outright and are entitled to any dividends that are paid. You are not entitled to dividends if you trade shares and you don’t own them outright, but you can use leverage.

Open an IG share trading account if you want to invest, or use IG’s CFD services to speculate on share prices. You can also practice your trading strategy by opening an IG demo account first, which allows you to try out your investment or trading strategy completely risk-free.

Growth Exchange-Traded Funds (ETFs)

Investors may also want to consider using exchange traded funds (ETFs) as a way of gaining broader exposure to high growth stocks. These ETFs invest in fast-growing companies with the hope of matching or outperforming benchmark indices.

For example, the Vanguard Growth ETF, one of the largest growth ETFs on the market, aims to track the performance of the CRSP US Large Cap Growth Index. This means it focuses on larger companies that are still growing fast, like Amazon. Meanwhile, the Vanguard Small-Cap Growth ETF invests in smaller businesses that are more commonly associated with growth stocks.

You can find an ETF to suit any investment strategy you desire by using IG’s ETF Screener.

Top 5 UK growth stocks

Below are the five largest companies in the FTSE 250 by market capitalisation. But remember, past performance is not an indicator of future returns. Always do your own research.

1. Vistry Group
2. Darktrace
3. LondonMetric Property Group
4. Endeavour Mining
5. British Land

Vistry Group

Vistry Group — formerly known as Bovis Homes Group — is a differentiated house-building company which completed a deal to acquire Galliford Try's housing arm in January 2020, renaming the combined business Vistry. It then went on to integrate Countryside Homes in 2023.

Vistry is the UK’s leading provider of affordable mixed tenure homes, working as a responsible developer to work in partnership to deliver sustainable housing. It sells homes on the open market through three respected brands — Bovis Homes, Linden Homes, and Countryside Homes.

It sells a large proportion of the homes it builds through the business-to-business brand — Countryside Partnerships — which works with a partner to build homes for all tenures, many of which are classed as affordable homes.

In its recent trading update, Vistry said its total sales rate averaged 0.96 (2023: 0.87) in the year to date, increasing to 1.23 (2023: 1.24) over the 8-week period to 16 May 2024. Management said it is on track to complete on over 18,000 homes in 2024, an increase of more than 10% on the previous year and an improvement on its previous forecasts of 17,500 units. Forward sales totalled £4.9 billion of completions (2023: £4.5bn) as at 15 May 2024, with £2.1 billion scheduled for 2024.

Chief executive Greg Fitzgerald said: “The Group has had a good start to the year with our unique Partnerships model clearly demonstrating its market resilience. Working closely with our partners, we are seeing good demand in the Partner Fundedmarket and accompanied by an improving trend for our open market sales, are on track to deliver more han 10% growth in completions in FY24, with half year and full year profit expected to be ahead of last year.”

Market capitalisation: £4.2 billion

Darktrace

Darktrace shares have more than doubled in value over the past year. The cybersecurity company saw fiscal Q3 revenue grow by 36.5% year-over-year to $176.1 million and expected adjusted EBITDA margin for the quarter to be above its previously communicated FY24 guidance range of at least 21%.

The customer base grew by 170 customers in the quarter to a total of 9,402 by the end of March. It recently agreed a takeover deal with US private equity outfit Thoma Bravo worth some £4.2 billion — 44% more than its three month share price average at the time.

This makes sense — while the company has blue chip clients and widely approved cybersecurity technology — many analysts have argued that its valuation lags its US-listed peers. The company employs artificial intelligence to detect and destroy threats within IT networks and has worked on AI for a long time before it became a fashionable investing theme.

CEO Poppy Gustafsson said, "We are building a world-leading company using a unique form of artificial intelligence to address the societal challenge of cybersecurity. This proposed offer represents the next stage in our growth journey and I am excited by the many opportunities we have ahead of us. Our technology has never been more relevant in a world increasingly threatened by AI-powered cyber-attacks."

Market capitalisation: £4 billion

LondonMetric Property Group

LondonMetric Property Group is the UK’s leading triple net lease real estate investment trust (REIT) with a £6.2 billion portfolio aligned to structurally supported sectors of logistics, healthcare, convenience, entertainment and leisure.

In its recent full year results, the company grew net rental income by 20.6% to £177 million from £146.8 million in the previous year, while net contracted rent more than doubled from £145 million during the period to £340 million due to merger activity. During the year, London Metric merged with LXi REIT and acquired CT
Property Trust. EPRA earnings (IFRS earnings post taxation) rose 20.3% to £121.6 million.

Chief executive Andrew Jones told investors: “This has been a transformational period for our Company with the successful execution of two M&A transactions. We have doubled the size of our portfolio to £6 billion, creating the UK’s leading triple net lease REIT and the third largest UK REIT by market capitalisation. Scale and income granularity are increasingly important and our activity has further enhanced our sector leading income metrics with reliable, predictable and exceptional income growth."

Market capitalisation: £4.1 billion

Endeavour Mining

Endeavour was recently demoted from the FTSE 100, but the now FTSE 250 stock may be attractive to value investors. It owns a large portfolio of gold assets, with four mines across the Ivory Coast, Senegal and Burkina Faso. All have more than a decade of mine life left at present.

The company’s key economic advantage is in its comparatively low cost of production — it expects to mine gold at a cost of between $750 and $1,300 per ounce in 2024 — compared to $1,400 for market titan Newmont.

Gold is close to a record high, buoyed by geopolitical uncertainty and central bank buying, especially in China. And with US rates expected to fall later in 2024, potential dollar weakness could see the yellow inflation hedge rise even higher.

Endeavour recently reported first quarter adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of $213 million, down 27% compared with Q4 in 2023. Meanwhile, adjusted net earnings of $41 million were flat compared to the fourth quarter. Operating cash flow before changes in working capital came in at $137 million - down 44% compared to the fourth quarter of 2023. Net debt currently stood at $831m at the end of the first quarter, with $481 million in cash and available liquidity.

Meanwhile, Endeavour's Sabodala-Massawa BIOX Expansion's first gold pour was completed on 18 April 2024, and is now only two years from construction launch, while the Lafigué development project remains on schedule and budget.

One of the key risks remain reputational; CEO Sebastien de Montessus departed recently under a cloud of accusations over improper payments and personal conduct. And the miner has also had to cope with the death of a contractor at one of its mines, and a strike at another.

Market capitalisation: £4 billion

British Land

British Land British Land is a major property developer, with £8.7 billion in land assets, £13 billion in assets under management and boasting 21 million square feet in floor space. The company is focused on business campuses, including Broadgate, Paddington Central and Regent's Place in London. Through its retail and London urban logistics division, it operates retail parks, including open air and traditional covered parks.

In the recent full year results, the company grew underlying profits by 2% to £268 million, while its EPRA cost ratio fell to 16.4% from 19.5% in the same period in 2023. However, EPRA net tangible assets per share fell by 4.4% to 562p during the year. British Land says its overall portfolio occupancy stood at 97% at the year end, with 96% in its campuses, 99% in its retail parks and 100% in its London urban logistics. During the period the company sold half of its holding in Meadowhall Shopping Centre to Norges Bank Investment Management for £360 million.

Chief executive Simon Carter told investors, "Our strategy of focusing on campuses, retail parks and London urban logistics is delivering. ERV growth accelerated to 5.9%, exceeding our guidance in all sectors. We outperformed the MSCI benchmark by 300 basis points and values were stable in the second half. Our operational momentum continues with highoccupancy, strong leasing and good cost discipline driving underlying profit growth of 2%."

Market capitalisation: £4 billion.