These hot growth stocks are trading far too cheaply!

Royston Wild looks at two stocks with terrific earnings potential.

| 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.

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.

IWG (LSE: IWG) found itself sinking in Tuesday trading after a disappointing reaction to half-year numbers. The stock was last dealing 8% lower on the day after hitting four-and-a-half-month troughs earlier in the session.

The workspace provider, which was known as Regus up until fairly recently, announced that revenues at constant currencies slipped 0.4% during January-June, at £1.17bn. As a result the business saw pre-tax profit rattle 4% lower year-on-year, to £80.8m.

Despite this patchy first-half result however, the company remains optimistic with sales moving higher again more recently. Chief executive Mark Dixon commented that “as expected the improving trend in sales activity at the beginning of the year has led to a gradual improvement in revenue growth throughout the first half, with IWG returning to growth in Q2._

He added: “Current sales activity remains robust and we are therefore confident that our mature business will see growth over the second half of 2017.” 

Dixon also noted that with revenues back on the rise and costs coming down (overheads fell 14% during January-June, to 124.3m), the company expects strong cash generation during the second half.

And as a result, IWG elected to raise the interim dividend 13% to 1.75p per share.

Great value

The City expects IWG to generate earnings growth of 21% and 20% in 2017 and 2018 respectively. And in my opinion these forecasts make the business sterling value for money.

Sure, a forward P/E ratio of 17.5 times may sit above the widely-considered value watermark of 15 times. But a sub-1 PEG rating of 0.8 times suggests the company is actually attractively valued relative to its growth prospects.

Today’s update could prompt a slight trimming of these forecasts. But I remain convinced IWG’s position as market leader in the fast-growing workspace-as-a-service segment (the company operates in almost 3,000 locations across the globe) should lead to resplendent earnings growth in the years ahead.

Auto star

AB Dynamics (LSE: ABDP) is another London-quoted stock I am backing to deliver sterling bottom-line expansion.

The number crunchers expect growth to be relatively modest in the more immediate term, and have chalked in growth of 3% in the year to 2017. But profits are expected to really stomp higher from next year, and a 22% advance is expected for fiscal 2018.

A P/E multiple of 21.5 times for the upcoming year may look pretty uninspiring at first glance, and quite rightly. But a forward PEG rating of 1 suggests AB Dynamics should be drawing admiring glances from value chasers on the hunt for hot growth stars.

The company, which creates testing and measuring instrumentation for the auto industry, is benefitting from the vast sums the world’s carbuilders are ploughing into R&D. This trend helped power revenues at AB Dynamics 9% higher in the six months to February, to £11m, and pre-tax profits also 9% higher to £2.5m.

And following its recent £6m equity fundraising, the tech titan has plenty of money to develop the next wave of products and to support its growing customer base. I believe the company has what it takes to keep delivering knockout earnings growth.

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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

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

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

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

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »