ASOS (LSE: ASC), Boohoo.Com (LSE: BOO), AO World (LSE: AO), Ocado (LSE: OCDO) and Just Eat (LSE: JE) are some of the market’s hottest growth stocks. However, they have all seen their share prices fall over the past few months as investors have become concerned about their high valuations.
Nevertheless, this sell off has given the canny investor the chance to buy in at low price. So, which company presents the best opportunity?
GARP
GARP, or “growth at a reasonable price”, is an investment strategy which seeks to combine the qualities of both growth and value investing.
GARP investors usually use the PEG ratio to unearth bargains. This ratio combines the company’s P/E ratio and projected earnings growth rate over the next year or so. A PEG ratio of less than one shows that the company in question offers growth at a reasonable price.
Unfortunately, ASOS’s earnings are expected to shrink this year, which means it’s not possible to compute a PEG figure. However, the company’s profits are expected to rebound during 2015.
The City has pencilled in ASOS’s earnings to expand 43% during 2015 and the company is currently trading at a P/E of 48.3, giving a PEG ratio of 1.1. Not quite low enough to be considered a GARP company.
Looks expensive
ASOS’s peer, Boohoo, also appears overpriced. The company is currently trading at a forward P/E of 29.9 but is only expected to grow earnings by 20% next year.
These numbers imply that the company is trading at a PEG ratio of 1.5, once again not low enough for the company to be considered to be a GARP stock.
Cheaper picks
AO World’s price looks more attractive. AO’s earning are expected to jump nearly 70% this year, while the company is only trading at a forward P/E of 77, implying a PEG ratio of 1.1. What’s more, during 2016, AO’s earnings are expected to rise a further 60% — that’s nearly 200% earnings growth over two years.
A quick back-of-the-envelope calculation implies that AO is trading at a PEG ratio of less than 0.5 based on its projected growth over the next two years — now that is growth at a reasonable price.
Meanwhile, online grocer Ocado, is expected to report earnings per share of nearly 2p this year, although because the company made a loss last year, it’s not possible to calculate a percentage growth rate.
Still, Ocado’s earnings per share are expected to jump 130% during 2015, which puts the company on a 2015 P/E of 72 and a PEG ratio of 0.6. So it seems as if Ocado’s shares currently offer growth at a reasonable price.
The cheapest of all
And finally, Just Eat, which appears to be the most undervalued growth stock in this piece. Just Eat’s earnings per share are expected to surge nearly 300% during 2015, putting the company on a 2015 P/E of 41 and a rock bottom PEG ratio of 0.1.
It seems that if you want growth at a reasonable price, Just Eat is the company to go for.
