2 growth stocks I wouldn’t touch with a bargepole

Royston Wild looks at two growth stocks standing on increasingly-dangerous ground.

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Used car retailer Motorpoint (LSE: MOTR) has seen its share price race higher on Thursday after a positive market reception to its full-year trading update.

Investors sent Motorpoint 3% higher from the midweek close and to levels not seen since last October.

The auto supermarket advised that turnover for the period to March 2017 is expected in at £820m, up 12.5% year-on-year. And as a result Motorpoint expects profits to register “at the upper end of the range of current market expectations, reflecting the improving trading performance in the second half.”

Broker consensus has put profits for fiscal 2017 at between £14.6m and £15.5m, Motorpoint noted.

While broad retail conditions in the UK have deteriorated since the turn of 2017 amid rising inflation and increasing fears of economic trouble, Motorpoint has endured no such hardship.

Rather, the car seller noted that “the final quarter… has seen increased customer footfall and online traffic, driving improved volume performance both in like-for-like sales and sales at new sites.”

A bumpy road ahead?

But whether or not Motorpoint can keep up the pace in the months and years ahead remains a bone of huge contention.

Indeed, the retailer itself advised that “there remains some macroeconomic uncertainty in the UK economy, with the EU referendum result prompting ongoing customer caution, and a more subdued new car market anticipated following last year’s record performance.”

City brokers do not expect Motorpoint’s bottom line to crash any time soon however, and have chalked-in earnings growth of 28% and 13% during fiscal 2018 and 2019 respectively.

But I reckon these numbers are at variance with signs of growing stress in the used car market. As UBS data recently showed, while average retail prices on online portal Motors.co.uk grew steadily through the last calendar year, values fell 4% in January and rose just 1% in February.

While some would argue that a forward P/E ratio of 9.4 times bakes in the risks facing Motorpoint, I am not so convinced and believe the firm’s heady forecasts could be subject to painful downgrades as the year progresses.

Copper clanger

Looking further afield, I also believe copper producer Antofagasta (LSE: ANTO) is a poor growth prospect as oversupply threatens to put the clamps on metal prices.

The number crunchers expect the Chilean miner to punch earnings expansion of 38% this year and 14% in 2018. However, I reckon Antofagasta is still an unappealing pick, irrespective of these forecasts, and particularly as these projections leave the digger dealing on a high forward P/E rating of 22.6 times.

Latest trade data from China amplified concerns that underlying demand for the red metal remains weak, with total imports of 340,000 tonnes in February reflecting a 10.5% month-on-month drop.

And while strike action in Peru has helped support copper prices more recently, a flurry of mine expansions across the globe threatens to keep the market swimming in excess metal in the years ahead, a worrying sign for future prices of the bellwether commodity.

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.

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