When looking for good investments, high-flying stocks often catch my eye. However, former top growth stocks that have fallen out of favor can also represent good undervalued buys. The past month has seen high volatility on the FTSE 100 index, due to a busy earnings season and the war in Eastern Europe. Therefore, here are a couple of growth stocks that I think are worth buying despite a short-term dip.
Higher profits expected in upcoming results
The first company I’m referring to is JD Sports Fashion (LSE:JD). Over the past month, the share price is down 22%, and over one year it’s down 10%.
One reason for the slump is due to recent developments. JD Sports and Footasylum (the business it tried to buy) were recently fined £4.7m by the Competition and Markets Authority (CMA). This was linked to the blocked merger between the companies, during which it’s alleged commercially sensitive information was revealed during meetings without being passed on to the CMA. Not only is JD Sports damaged from not benefiting from the merger, but now it also has to pay a fine.
Despite this negative issue, I think the growth stock can shake it off in the longer term. When I consider the fundamentals of the business, it’s doing well. Even though the full-year results have been slightly delayed, a trading update stated that profit before tax is expected to be at least £900m. This is an increase from the September estimate of £750m.
The boost from having both an online presence and physical stores should serve it well regardless of what the future holds regarding Covid-19. Therefore, ahead of what I think will be strong full-year results, I’m considering buying some shares now.
A growth stock with a recent earnings hit
The second former top growth stock that’s down heavily is Hargreaves Lansdown (LSE:HL). In the past month, the share price is down 21%. Over a one-year timeframe, it’s down 30%.
The reason for the fall recently was some underwhelming results released in February. My colleague Rupert Hargreaves ran through the results in more detail here. In short, revenue year on year was down 3%, with higher costs leading to profits before tax being down 20%.
I do see potential for this stock though, due to a pivot to expand into wealth management. The company already benefits from over 1.7m clients using the platform to book their own trades. So it has a great pool of target clients that it can try and cross-sell into more advisory portfolios.
The fees in this area will be more lucrative than those from just executing transactions on stocks, so this could be a major win for the company if the strategy is executed correctly.
As a risk, this move will require higher short-term costs, which could further drag down profitability in 2022. So as a potential buyer, I need to be aware of potential short-term pain before long-term gain.
