The UK is home to many growth stocks — you know, those companies that typically see sales and profits surging above the average for the market. Many of these tend to be small or mid-sized companies. Such smaller companies are often less-well-known and not so widely covered by City analysts. This can create great opportunities to find undiscovered gems.
Top growth stocks
So which ‘no-brainer’ growth stocks would I consider buying in February? At the top of my list right now is a small medical equipment provider called SDI Group (LSE:SDI). It focuses on digital imaging and sensor products. What I like about this Cambridge-based business is its strategy. It aims to grow by buying smaller, niche and high-margin businesses. By allowing them to operate somewhat independently, SDI can respond quickly to new trends and events. It’s a strategy that seems to be working. Sales have tripled over the past five years, while profits have grown six-fold.
Bear in mind that to continue above-average growth it will need to keep finding new businesses to buy. That can take time so I might need to be a patient investor. And acquisitions can be risky too if they don’t work out. But with a profit margin and return on capital both above 20%, I’d say this is a high-quality business. For me, mixing growth and quality characteristics is a winning combination and I’d be happy to add it to my Stocks and Shares ISA.
TV and Movies
The next top growth stock I’d buy in February is Zoo Digital (LSE:ZOO). With a market capitalisation of just £125m, it’s firmly in the small-cap group. But what it lacks in size, it makes up for in potential. Zoo provides media services to the global entertainment industry. For instance, it provides a host of services including subtitling and dubbing to adapt TV and movie content to global audiences.
Major global streaming giants like Netflix continue to create more content for its subscribers. Global content spend has reached record levels and is forecast to rise further over the coming years. It’s creating volumes of TV material that needs to be prepared for distribution in many countries and languages, resulting in more demand for Zoo’s services.
An exciting growth story
It’s not just Netflix either. WarnerMedia, NBCUniversal and ViacomCBS have all launched streaming video platforms in the US and they’re expected to expand internationally in 2022. I reckon all of this new original content bodes well for Zoo over the coming years.
A word of warning, though. The profit margin is relatively slim at under 3%. I’d like Zoo to focus on growing that number. A greater margin could provide more of a buffer. Also, as the market grows it could invite stronger competitors. Zoo will need to stay on its toes to keep up.
That said, Zoo recently reported a strong trading performance, and it expects revenues for the year to be ahead of analyst expectations. Also, it’s encouraging that it has been appointed as a primary vendor for an upcoming European launch of a streaming video service. This is likely to raise sales further. Overall, the future looks bright for it in my opinion and I’d buy this growth stock today.
Harshil Patel owns Scientific Digital Imaging. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
