2 growth stocks I would avoid like the plague

Royston Wild discusses two growth shares standing on fragile ground.

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Despite the release of solid trading numbers on Wednesday, I’m convinced Motorpoint Group (LSE: MOTR) is a share that should be keenly avoided.

The retailer advised today that revenues jumped 18% during the six months to September to £483.2m and, as a result, profit before tax and exceptional items boomed 64% to £10.5m.

The result prompted chief executive Mark Carpenter to comment: “Whilst market conditions are always subject to external changes, the supply of stock coming into the business remains good and management are comfortable with the Group’s trading performance so far in [the second half].”

The solid first-half performance prompted Carpenter to advise that the firm remains on track to hit its full-year targets.

Drive away

At the moment, the City doesn’t harbour any worries on Motorpoint’s earnings outlook in the near term and beyond. Indeed, current broker consensus suggests that a 29% profits advance is on the cards for the year to March 2018. What’s more, an extra 15% rise is forecast for fiscal 2019.

News that these forecasts translate through to exceptionally low paper valuations may draw plenty of share pickers in, too. On top of a forward P/E ratio of 10.9 times, a reading that falls below the widely-accepted value watermark of 15 times, the car dealer also sports a corresponding sub-1 PEG multiple of 0.4.

Still, recent data from the British car market suggests that these heady growth estimates could be in line for swingeing downgrades.

Latest numbers from the Society of Motor Manufacturers and Traders (SMMT) this month showed sales of second-hand vehicles fell for the second successive quarter in July-September, with 2,102,078 vehicles driving off the forecourt. This was down 2.1% from the corresponding 2016 period.

Demand for used autos, unlike those for brand new models, is clearly not in freefall. But Q3’s figures show that consumer appetite for cars is steadily worsening (sales of second-hand cars fell by a more modest 0.7% in the second quarter).

Motorpoint’s share price performance has been impressive against this backdrop with the retailer’s market value ballooning by 37% during the past two months.

But I reckon investors should take this opportunity to book profits given that broader economic pressures could drive demand for big-ticket items like cars into the dirt, looking down the road. And Motorpoint’s rising cost case causes further alarm as cost of sales jumped 17% in the first half to £445m.

In a hole

Like Motorpoint, Petra Diamonds (LSE: PDL) is also tipped to deliver stunning earnings growth. After being bitten by three consecutive annual earnings slides, it’s finally anticipated there will be a move in the right direction, with a 149% rebound in the period to June 2018.

Such a forecast creates a mega-low P/E ratio of 6.9 times, too, but I reckon investors should give the digger a wide berth today.

Sure, Petra Diamonds received good news in late September when Tanzania lifted an export embargo and striking workers returned to work.

But all things considered, I believe the mining giant carries far too much risk right now. Indeed, a pretty uncertain production outlook (stones output fell 4% to 1,053,817 carats during July-September due to operational issues at its Finsch asset and Kimberley Ekapa joint venture) signals that diamond prices are back on the defensive. Include news last month that the company is on the verge of breaching debt covenants and both negatives should deter investors from ploughing into Petra Diamonds.

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 considered so you should consider taking independent financial advice.

Royston Wild 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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