2 bargain growth stocks I’d buy with £2,000 today

These two stocks are trading far too cheaply for the terrific growth they offer, says G A Chester.

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Bargain growth stocks aren’t always easy to identify. However, I’m looking at two companies today that I believe are trading far too cheaply for the terrific growth they offer.

The first, which released impressive annual results this morning, has been in existence for little more than 10 years. It joined the stock market towards the end of 2015 and is listed in the FTSE SmallCap index. The second has a heritage extending over 100 years and is a mid-cap FTSE 250 company. Although very different businesses, I’d be happy to buy a slice of both today.

Good workout

Much as Aldi and Lidl have shaken up the supermarket sector, some no-frills operators are finding strong demand for their offering in the gyms segment of the leisure market. The Gym Group (LSE: GYM), which claims to be the pioneer of low-cost gyms in the UK and the fastest growing operator in the sector, today reported a 24% increase in annual revenue to £91.4m.

Top-line growth was helped by the opening of 21 new gyms and the acquisition of 18 others, which increased the total estate to 128. Growing scale benefitted the bottom line, with the company posting a 32% rise in underlying earnings per share (EPS) to 7.4p. The shares are trading a little lower on the day at 253p, which values the business at £325m, and puts it on a price-to-earnings (P/E) ratio of around 34.

On the face of it, the rating isn’t cheap. However, the company plans to open a further 15 to 20 new gyms this year and will also benefit from the profitability of those sites opened in recent years reaching maturity. As a result, strong EPS growth is forecast to continue, rapidly reducing the P/E — to around 27 this year and 21 next year.

The investment proposition looks highly attractive to me. In the short term, management sees “no material identifiable impacts from Brexit at this time” and reckons the business has “the ability to thrive even if the economy becomes less buoyant.” In the long term, there’s potential to double the size of its estate. Finally, a current modest dividend of 1.2p a share (0.5% yield) has scope for considerable growth in the future.

Rich vein

The share price action of precious metals miners can be volatile, often being an exaggerated version of the prices of the metals themselves. Miners can’t do much about metals prices but can focus on maintaining a strong balance sheet, prudently building their asset base and operational efficiency.

For these reasons, silver miner Hochschild (LSE: HOC) is a company I’ve long admired. And with its share price at sub-200p, compared with a 52-week high of over 330p, I believe now could be a great time to invest in this business.

Record production in 2017 produced a solid rather than exhilarating bottom-line outcome, but EPS growth is set to accelerate rapidly over the next couple of years. City analysts are forecasting $0.11 (7.9p at current exchange rates) this year, followed by $0.17 (12.2p) next year. This gives a P/E of 25, falling to 16, and a price-to-earnings growth (PEG) ratio of 0.3, which is well to the value side of the PEG fair value marker of one. With dividends also set to pick up, giving a prospective yield of 1.2%, rising to 1.6% next year, I see a lot to like about Hochschild at the current share price.

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.

G A Chester 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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