2 growth stocks you could regret not buying

Royston Wild discusses two stocks with exceptional earnings potential.

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Gamma Communications (LSE: GAMA) has come onto the radar of we Fools before, the small-cap last attracting our attention after its set of financials were released in September.

The company’s sales and profits performance during January-June were certainly impressive, as was its decision to light a fire under the half-time dividend. And the AIM-quoted firm was at it again on Tuesday, its latest trading statement showing that demand for its product suite continues to ignite.

Make the connection

Gamma, which provides communications services to British business, declared that adjusted EBITDA for the full fiscal year is likely to beat market expectations. The company said that the likely beat “reflects a strong demand in the business market for Gamma’s portfolio of products,” adding that growth has been strong in all of its non-traditional products.

The Newbury-based business said that its SIP Trunking and Cloud PBX products “continued to grow ahead of the market,” while the past investment it has made in its broadband and ethernet products helped drive volumes here too. Moreover, Gamma also saw volumes across its mobile propositions growing last year as well.

To put the cherry on the cake, Gamma advised that its balance sheet has continued to strengthen, with its closing net cash balance clocking in at £31.6m versus £28.2m a year earlier. This clearly bodes well for further R&D investment as well as additional dividend growth (the firm hiked the interim dividend 12% back in September).

City brokers had been expecting earnings to have swelled 3% in 2017 prior to today, but this is on course for an upward revision following today’s update. And improving demand across the business is likely to see the predicted profits growth of 7% this year and 8% in 2019 get positive amendments too.

A forward P/E ratio of 28.5 times may be toppy on paper, but I reckon this is fair value given Gamma’s exceptional momentum.

Forecourt fave

I believe Applegreen (LSE: APGN) is another share those seeking strong and sustained profits growth need to zero in on today.

The petrol station retailer is already the biggest motorway service area operator in its home territory of Ireland, its focus on offering super-low fuel prices proving successful in drawing motorists through its store doors.

This success at home has seen Applegreen move its crosshairs overseas in the hunt for long-term earnings expansion. Indeed, the business has identified Britain and the US as hot growth markets, and it is rapidly building its footprint in these destinations through targeted M&A.

City analysts are therefore expecting earnings at Applegreen to keep growing at double-digit percentages — the AIM-listed business is expected to follow a predicted 17% profits advance in 2017 with a 13% rise in the present period. And in 2019 analysts expect the bottom line to swell by an extra 17%.

Now it could, like Gamma, be considered a little expensive for some, the firm rocking up on a prospective P/E ratio of 21.1 times. But this premium paper valuation is fully warranted given the brilliant profits potential of the retailer’s aggressive expansion strategy.

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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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