2 dirt-cheap growth stocks to consider in November

P/E ratios under 13 and strong growth prospects have these under-the-radar stocks on my watchlist.

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After growing earnings by double-digits in each of the last four years, shares of specialist manufacturer Carclo (LSE: CAR) trade at only 10.8 times forward earnings, which has put the firm on my watch list.

The company is fairly diversified with three main divisions: technical moulds for the medical devices industry that brought in £88m in the year to March, making exterior lights for supercars that accounted for £43m in sales, and an aircraft components division that grossed £7m.

Each of these end markets has performed very well in recent years and increased volumes have improved operational gearing, leading to the firm’s operating margins increasing annually from 5.39% in 2013 to 8.3% in fiscal 2017.

However, it’s not all roses and butterflies for Carclo as the UK’s decision to exit the EU has thrown up significant roadblocks for the firm. Brexit wreaked havoc on the bond markets and led to a sharp fall in the bond yields it used to discount its pension obligations. Because of this, its net pension liabilities rose from £18.9m to £27m year-on-year in 2017, which wiped out the firm’s excess cash position, increased leverage and led it to cancel its dividend for the year.

But even with that in mind, Carclo was never a huge income stock and analysts have pencilled in earnings increases of 5% and 20% for the next two years respectively as global GDP growth remains high, stoking demand for each of its end markets. Economic tailwinds and a history of making smart bolt-on acquisitions makes hitting these forecasts entirely reasonable. And with a very attractive valuation, I’ll be digging into Carclo some more in November.

Scalding hot growth on tap? 

Another cheap growth stock on my radar is relatively new IPO Strix Group (LSE: KETL). The company designs and manufactures safety devices for kettles and other water heating devices. The group is the leader for such devices in regulated markets such as the US, UK and Europe with market share of around 60% at the time of its IPO.

This strong position and its patent-protected devices give it significant pricing power that management has used to attain operating margins of 27% in the year to December 2016. In the same year, sales grew 10% as it introduced new products and the global kettle market grew

Looking forward, the group sees good potential to increase its share of non-regulated markets, where it currently supplies roughly 18% of all kettles and in China, where its market share is around 50%. Strix is accomplishing this by developing new devices that offer both the cost savings its OEM customers require and introducing higher safety levels than fellow competitors can offer.

The group can accomplish this as it owns and operates its own manufacturing facilities. One on the Isle of Man focuses on more precision parts, while its Chinese operations focus on volume. With solid growth and income potential and a reasonable valuation of 12.5 times forward earnings, I’ll be keeping an eye on Strix Group in the coming months.

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.

Ian Pierce has no position in any of the 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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