2 top growth stocks I’m considering buying in April

With prospects improving, it looks to me to be the perfect time to buy these growth stocks.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

It might seem odd to label Premier Oil (LSE: PMO) and Genel Energy (LSE: GENL) growth stocks, but now the price of oil has stabilised, I believe that is precisely what they are. 

Today’s full-year 2017 figures from Genel support this conclusion. After a year of consistent oil payments by the Kurdistan Regional Government and reduced capital spending, the company was able to generate free cash flow before interest payments of $142m during 2017, more than double the figure reported for 2016, even though production slumped from 53,300 barrels a day to 35,200 bbl/d. Revenue increased to $229m from $191m and operating profit reported for the period hit $298m. 

Turnaround in progress

Management expects 2017’s performance to continue into 2018. Production is expected to remain constant at around 32,800 bbl/d, and capital spending is projected to be no more than $140m. 

Considering these targets, it looks as if the company is on track to report another year of substantial free cash generation in 2018. Valuing the business on free cash flow generation alone, the shares are currently trading at a historical price to free cash flow ratio of around four, which is significantly below the oil and gas sector median of 16. 

That being said, due to the risks surrounding Genel’s operations in the Middle East, it’s unrealistic to expect that the shares would trade at a sector median valuation. However, such a deep discount the rest of the sector is, in my view, unwarranted. If the company repeats its 2017 performance this year, the market may take a different view of the business and award the shares a higher valuation, that’s why I’m considering buying in April ahead of this re-rating.

Paying down debt

I also believe shares in Premier could re-rate as well, as the company builds on its robust 2017 performance. 

Last year it generated a positive free cash flow of $71.2m, allowing it to marginally reduced debt to $2.7bn (and my Foolish colleague Roland Head believes it has already fallen further). This free cash flow was achieved on average production of 75,000 bbl/d and management is currently guiding for production of between 80,000 to 85,000bbl/d for full-year 2018. The average realised oil price for 2017 was $52.1bbl, compared to today’s price of $69.1bbl (a third higher). Some of Premier’s production for 2018 is hedged at a lower price, but generally speaking, the firm should benefit tremendously from the uplift in oil prices during 2018. 

Put simply, these figures suggest Premier is going to produce a13% more oil next year at a price 30% higher than achieved during 2017. This should allow the group to pay down a large chunk of debt, proving to the market that it is not going to go out of business anytime soon. And when debt does begin to fall meaningfully, shares in Premier should re-rate higher. 

Indeed, today the stock is trading at an extremely depressed forward P/E of just 5.7, as the market still doubts the firm’s ability to be able to pay down its massive debt obligations. So, when Premier finally proves it has its finances under control, there’s scope for the stock to double as it returns to a sector average valuation. 

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.

Rupert Hargreaves owns no share 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

Investing Articles

The Ocado share price soars 15%. Is it finally time to buy this FTSE growth stock?

The Ocado share price has exploded. Our writer looks at why this has happened and considers whether he should buy…

Read more »

Young black woman walking in Central London for shopping
Value Shares

Down 70%, could Burberry be one of the FTSE 100’s best value stocks?

Burberry shares have tanked due to a slowdown in the global luxury goods market. Are we now looking at one…

Read more »

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

At the lowest level since 2020, is this US icon a good stock to buy?

Jon Smith's on the hunt for stocks to buy on the other side of the pond, but isn't sure this…

Read more »

Investing Articles

This 9.75% yielding FTSE 100 share is a total no-brainer for second income

This FTSE 100 insurance company is an absolutely brilliant source of second income and Harvey Jones reckons it will be…

Read more »

Dividend Shares

I could make £14.2k of passive income from £99 a week with this secret sauce

Jon Smith explains why sacrificing the immediate reward of dividends today can boost his long-term passive income prospects.

Read more »

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

Which looks the better bank buy right now: Lloyds or NatWest shares?

Lloyds shares are a very popular pick among FTSE 100 investors, but I think there are several better choices overall,…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d target a £14,616 annual passive income with M&G shares!

Big passive income can be generated over time with 9.5%-yielding M&G shares, especially if the dividends paid are used to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

If I’d put £1k in this FTSE 100 stock five years ago, here’s how much I’d have now!

Mark David Hartley works out what sort of profit he’d have made by investing in this FTSE 100 pick pre-pandemic.…

Read more »