Finding stocks with high growth potential and low valuations is never easy. It seems as though the market prices in upbeat growth potential, which means there is often a relatively narrow margin of safety on offer. However, reporting on Friday were two smaller companies which seem to have a perfect mix of growth potential and low valuations. Here’s why now could be the right time to buy them.
Improving outlook
Global provider of engineered electronics, TT Electronics (LSE: TTG), released an upbeat update. Trading for the four months to the end of April has been in line with expectations. Revenue has risen by 10% versus the same period of the prior year, while it is 1% higher on an organic basis.
Encouragingly, the company’s order book is strongly ahead of the previous year. This provides the business with better visibility over the medium term. It also indicates that the strategy to reposition the business in structural growth markets where there is increasing electronic content is working well.
The acquisition of Cletronics in 2017 provides TT Electronics with further capabilities in North America. This should help to improve its earnings growth outlook. In fact, in the current year the company’s bottom line is expected to rise by 13%. Next year, further growth of 10% is forecast, which could lead to improving investor sentiment.
Since TT Electronics trades on a price-to-earnings growth (PEG) ratio of only 1.3, it appears to offer a wide margin of safety. This could limit its downside risk in the short run and lead to a higher level of capital gain in the long run. As such, now could be the perfect time to buy it.
Better-than-expected performance
Also reporting on Friday was designer and manufacturer of microwave electronic products, Filtronic (LSE: FTC). Trading during the fourth quarter of the year in the Wireless business was better than previous guidance. While impressive, some of this was offset by short-term weakness in trading in Broadband. However, when the performance of the two segments is combined, the company’s management now expects total revenue to be around £35m in the year to the end of May 2017.
This better-than-expected top-line performance has caused the company’s share price to rise by 30% on the day of its update. It is also expected to boost profitability in the current year. Filtronic’s earnings are due to rise by 225% in financial year 2017, followed by further growth of 17% next year. This puts the company’s shares on a PEG ratio of just 0.5, which suggests they offer a wide margin of safety, despite their improving outlook.
Clearly, Filtronic is a relatively small company which lacks the size and scale of many of its larger peers. As such, it could prove to be a relatively risky buy. However, with high potential rewards, its risk/return ratio suggests that now could be the right time to buy it.
