Finding bargain growth stocks may be more difficult today than it was even 12 months ago. The FTSE 100 has risen by a further 2.6%, with its Bull Run continuing to gather pace. In such a situation, investor sentiment towards stocks with above average growth potential may be at high levels. But there could still be opportunities to generate high capital returns from cheap growth shares.
An improving outlook
One such company is housebuilder Taylor Wimpey (LSE: TW). It has experienced an uncertain period since the EU referendum, with its share price being highly volatile. Investors seem to be unsure about the prospects for the wider industry than they were a few years ago, with there being the potential for a decline in demand for new housing as the effects of Brexit on the economy continue to be felt.
However, the reality is that there is a major lack of supply of new homes. Even if the UK’s population growth ground to a halt, it would still take many years for the supply deficit of new homes to be reduced to zero. And with population growth expected to remain at current levels in future years, the prospects for the housing market seem positive. This may lead to improved financial performance for housebuilders.
A low valuation
Despite a positive outlook for the housing market, Taylor Wimpey continues to trade on a relatively low valuation. It has a price-to-earnings (P/E) ratio of around 8.8 using 2018’s forecast earnings figure. With its bottom line due to rise by 4% next year, it could trade on an even more appealing valuation in future. This could prompt investors to become more attracted to its long-term growth story.
While the outlook for the housebuilding market may be uncertain, the company has made improvements to its balance sheet in recent years. They should reduce its future risks, while a large land portfolio means the company has an entrenched position in what may prove to be a strong growth market in the long run.
Growth at a reasonable price
Also offering a low valuation and improving profit potential is online marketing company Veltyco (LSE: VLTY). It released a positive trading update on Monday which showed that trading in December continued to be strong. In fact, it now expects its results for the 2017 financial year to be significantly ahead of market expectations. Net revenues are now due to be in excess of €14.5m, with EBITDA (earnings before interest, tax, depreciation and amortisation) to be above €8m.
With Veltyco trading on a price-to-earnings growth (PEG) ratio of 1.7, the company seems to offer growth at a reasonable price. Its shares are already up over 10% following its trading update, and it would be unsurprising for them to continue to make gains in the near term. With its trading conditions being generally positive, the company seems to be in a strong position to deliver above average earnings growth in future years. As such, it could prove to be a sound investment.
