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 has made huge 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 always slap large discounts on these types of companies, but these often 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.

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 dealing account if you want to invest, or use IG’s spread betting or 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.

1. Darktrace
2. Endeavour Mining
3. Hiscox
4. LondonMetric Proprerty Group
5. Vistry Group

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 notes that ‘, 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: £4.2 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 2023 full-year sales of $2.1 billion and cash profits of $773 million — profits had fallen by around a quarter on 222 due to higher inflation-driven exploration and operating costs. But costs are relative — and gold is riding high.

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: $4.1 billion

Hiscox

Hiscox is a famous name in the UK’s insurance world. Based in Bermuda, the insurer is behind one of the oldest syndicates on the Lloyd’s of London insurance market that provides cover for large risks including cyberattacks or natural disasters.

It also has a retail arm that insures typical activities like driving, in addition to a reinsurance and insurance-linked securities business — and is led by former CFO and now CEO, Aki Hussain.

In recent full-year results, net insurance contract written premium grew by 10.7% year-over-year in constant currency terms to $3.56 billion. Accordingly, Hiscox saw record profit before tax of $625.9 million — driven by a 36.4% increase in insurance service result at $492.3 million and a record net investment income of $384.4 million.

Hussain enthused that ‘the Group combined ratio below 90% and ROE of 21.8% have led to very strong capital generation, which we are deploying for further growth in all parts of the business in addition to a special return to shareholders of $150 million.’

The company enjoyed a relatively quiet hurricane season in 2023, alongside an underwriting insurance boom at Lloyd’s insurance market.

Market capitalisation: £4.2 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 recent interim results, the REIT noted that net rental income had increased by 6.7% to £76.9 million — driving EPRA earnings up 5.8% to £53.1 million.

It also boasted strong operational activity. Rent reviews averaged a 19% increase on a five year basis, with urban logistics reviews coming in with 35% increases. Occupancy remains high at 99%, with an average WAULT of 11 years. There’s now contractual rental uplifts on 59% of the portfolio, with 86% of the portfolio rated between A and C for EPC purposes — future proofing against future environmental requirements.

CEO Andrew Jones enthuses that ‘Our portfolio is in great shape and its alignment to well positioned triple net income assets has helped to deliver a positive set of financial results, further increasing our net rental income, earnings per share and covered dividend. This puts us on track for a ninth consecutive year of dividend progression.’

Market capitalisation: £4 billion

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 2023 full-year results, the FTSE 250 business generated more than £4 billion in adjusted revenue, almost £1 billion more than in 2022. Completions rose from 11,951 to 16,118 — driving operating profit from £212.5 million to some £311.8 million.

Chairman Ralph Findlay OBE enthused that ‘the Group starts 2024 in a strong position and is focused on delivering tangible progress against its medium-term targets in the year. The Group holds a unique position within the UK’s evolving housing market, and with its strong leadership, is ambitious about its role in delivering much needed affordable housing to the country.’

Market capitalisation: £4 billion