This dirt-cheap growth stock could rise 25%+ by 2019

Buying this stock right now could mean high returns over the medium term.

| 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.

Finding stocks which can be classed as ‘dirt cheap’ may be getting more difficult as the FTSE 100 trades above 7,000 points. However, this does not mean it is an impossible task. Companies with upbeat growth outlooks can command high valuations and still return 25% or move within the next two years. Here is an example of such a stock which could be worth buying following its recent results.

Upbeat performance

Reporting on Wednesday was construction industry supplier CRH (LSE: CRH). Its sales revenue increased by 15%, while profit before tax was up 69% on 2015’s figure. This provides evidence that its current strategy is working well, with margins and returns ahead in all of its divisions. Furthermore, cash generation has been strong and the company has been able to exceed its de-leveraging target and improve the quality of its balance sheet. Given the uncertain outlook for the UK and European construction market in particular, this could increase the attractiveness of the company’s shares.

CRH’s diversity continues to be a key asset for its investors. It has enjoyed positive momentum in the Americas and with eight acquisitions completed already in the current year, it is becoming increasingly diversified. This lowers its risk profile somewhat and with sterling continuing to depreciate, the company’s financial performance could benefit from a positive currency translation over the medium term.

Bright future

Over the next two financial years, CRH is forecast to record a rise in its bottom line of 66%. Despite this, it trades on a price-to-earnings (P/E) ratio of just 22.1. This means that it has a price-to-earnings growth (PEG) ratio of just 0.8, which indicates that it has significant upside potential. In fact, its shares could easily move 25% higher and still have a relatively attractive PEG ratio. And since they trade at a discount to their historic average P/E ratio of 25.4, a higher valuation is rather easy to justify.

Sector peer

Of course, CRH is not the only construction company which could have a bright future. Sector peer Balfour Beatty (LSE: BBY) continues to mount a comeback after a challenging period. It is forecast to record a rise in its bottom line of 173% over the next two years. And since it trades on a PEG ratio of just 0.2, it appears to have greater upside potential than CRH between now and 2019.

However, Balfour Beatty also comes with greater risk. Its balance sheet is arguably less stable than that of its sector peer, while it has a less proven track record than CRH. It has been lossmaking in each of the last two years when compared to three years of double-digit profit growth for its industry peer.

Certainly, Balfour Beatty is in the midst of a transformation, but CRH appears to have a settled business model which is performing well. Therefore, while the two stocks appear to be worth buying, CRH seems to have the superior risk/reward ratio.

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.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »