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2 strong growth stocks with falling share prices

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One of the ways I’d look to outperform the market is by picking up growth stocks with good long-term prospects at a reasonable price, or trading more cheaply then was the case in the past. Here I look at two UK-listed shares that could see serious share price appreciation in the coming year and beyond.

A mining growth stock

The first is South African gold miner Pan African Resources (LSE: PAF). Over six months, its share price is down around 22%. However, on a 12-month view, the shares are up more like 40%.

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Over the same time frame, the share price of fellow gold miner Centamin has also fallen heavily. The gold price has also fallen from £1,480 per ounce to £1,286 at the time of writing. 

I like that Pan African Resources is an established miner, which for me makes it a bit less risky than other listed natural resources explorers and miners. The miner pays a dividend and has debt under control, which I see as positives.

It was hit by the pandemic, so in that light, the performance has been good. The management has said it’s on track to deliver on its full-year production guidance of around 190,000 ounces of gold.

On the downside, it’s always at the mercy of the gold price, which is clearly beyond its control. It also could face taxes from the South African government. There might be particular pressure on mines following the economic impact of the pandemic.

I’d like to see the share return to over 24p per share this year. The shares currently change hands at around 17p to 18p. The 12-month high, useful as a reference, is 28p. A rise in the gold price or inflation concerns could both be realistic triggers for this happening. For me, it’s a growth stock I’ll be keeping an eye on for my portfolio. 

A falling share price

The share price of software group First Derivatives (LSE: FDP) has recovered recently as the overall market has done well. But looking over six months, the shares are down 21%. Over one year they’re up 27%.

The recent dip then could be an opportunity for investors. The group has identified digital marketing, automotive, energy and manufacturing as markets that are particularly attractive, moving it away from its historic focus just on the banking and finance markets.

Risk and opportunity

The shares do still trade on a price-to-earnings (P/E) ratio of 40 times, so future growth needs to be strong. Otherwise these shares would clearly be very expensive. In a difficult year last year, results weren’t impressive. Interim results for the six months ended 31 August 2020, showed revenue only grew 3%. That’s why I’ll probably not be adding First Derivatives to my portfolio. 

However, if the shares could return to their year high, it would imply a 26% upside to the current share price, which I think would be a very credible return. A rising market, as well as an improved financial performance, which would bring down the P/E, could both be catalysts for this. 

Clearly, some growth stocks that are cheaper than they were. If they can put in strong financial growth in future results, then with a lower P/E, the price-to-earnings growth ratio could be attractive. According to Jim Slater, any PEG ratio below 0.7 could indicate an undervalued growth share, so I’ll keep my eyes open.

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Andy Ross 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.

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