Should you buy these two bargain growth shares?

Royston Wild runs the rule over two London-quoted growth stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While Dixons Carphone’s (LSE: DC) share price has remained broadly resilient in recent months, I reckon the electricals mammoth could be on the cusp of a sharp correction if UK retail data worsens.

This week was the turn of the British Retail Consortium (BRC) to underline the fragile condition of the high street. The body advised that like-for-like retail sales fell 0.4% year-on-year during May, with non-food retailers enduring their worst month since May 2011.

It comes as no surprise that discretionary spending is coming under the cosh as inflation steadily picks up (the CPI gauge hit a three-and-a-half-year peak of 2.7% in April). Indeed, BRC head of retail Paul Martin commented that “after the surge in retail sales last month — the by-product of this year’s relatively late Easter — retailers have been brought back down to earth with a thump.”

With inflation continuing to rise and wage growth stagnating, consumers are starting to feel the pinch,” he added.

A world of pain?

The difficult trading environment was this week underlined by Dixons Carphone’s rival AO World, whose share price plummeted to 12-month lows after the release of a worrying trading update.

The Bolton business advised that “the challenging trading environment we saw in the UK in the second half of last year has continued into the start of our new financial year,” a backdrop which — combined with the impact of strong comparatives last year — should see sales growth “slow significantly” during the first fiscal quarter.

Dixons Carphone has so far managed to avoid a horrendous sales slump despite the fall in consumer confidence following last June’s EU referendum. But there are still causes for concern — indeed, a 2% rise in domestic like-for-like sales between January-April indicates that the levée may be weakening (underlying revenues in the UK and Ireland rose 6% in the prior two quarters).

The City currently expects Dixons Carphone to follow a 6% earnings advance in the year to April 2017 with a further 5% rise in the current year, leaving the business dealing on a ‘cheap’ forward P/E ratio of 9.8 times.

Still, in my opinion this is not low enough given the strong possibility of hefty downgrades as shopper spending power comes under increasing strain and as supplier costs mount. I reckon investors should give Dixons Carphone short shrift right now.

Pipes powerhouse

I am certainly more optimistic over the earnings prospects of pipe manufacturer Tricorn Group (LSE: TCN), particularly after its stunning full-year financials release.

Tricorn was last 5% higher from Tuesday’s close after announcing that revenues had risen 3% in the 12 months to March 2017, to £18.5m, a result that powered “profits significantly ahead of market expectations.” The Malvern company snapped from pre-tax losses of £273m last year to profits of £230m in the period just passed.

Like Dixons Carphone, the City also expects Tricorn to keep earnings rattling higher and have chalked-in a 164% rise in the year to March 2018.

And with the business witnessing a steady build in customer demand (Tricorn noted that second half revenue was up 8% on the first six months, and 21.5% from the same period last year), I reckon current forecasts could be in line for meaty upgrades, particularly given that the company still trades on an unassuming forward P/E ratio of 10.8 times

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »