3 FTSE 250 growth stocks that look too cheap

Roland Head picks three FTSE 250 growth stocks he’s considering for his portfolio after recent falls.

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The FTSE 250 has risen by 85% over the last 10 years. Some of the index’s top growth stocks have risen by more than 500% over that time.

I reckon the FTSE 250 is a great place to go hunting for future winners. But the index has cooled over the last year, falling 11%. I reckon this fall has created some possible bargains. Here are three cheap growth stocks I’m considering for my portfolio.

Super quality, fair price

Investment platform AJ Bell (LSE: AJB) benefited strongly from the pandemic trading boom. Pre-tax profit rose from £37.7m in 2019 to £55.1m in 2021.

However, stock markets have calmed down as life has returned to normal. Broker forecasts for this year suggest profits could fall by around 5%.

AJ Bell’s share price has fallen by more than 40% over the last year as investors have turned cautious. I think this could be a chance for me to pick up a quality business cheap.

After all, this year’s slowdown is only expected to be a one-off blip. Forecasts suggest that earnings will rise by 15% next year and again in 2023/24.

Today, I can buy AJ Bell shares at a price of 25 times forecast earnings, with a 2.7% dividend yield. For a business with a 38% operating margin and decent growth potential, I think this looks very reasonable.

A classic fashion brand

Demand for the distinctive boots made by Dr Martens (LSE: DOCS) is stronger than ever. Sales rose by 15% to £773m last year. This number is expected to have hit £908m during the year ended 31 March.

City analysts expect Dr Martens earnings to keep rising over the next two years. But stock market investors seem to disagree. The stock has fallen by 55% over the last year.

One problem has been that the company has warned of supply chain problems hitting US shipments. Rising costs have also forced Dr Martens to raise its prices, which could hit consumer demand.

We’re still waiting for full-year figures to 31 March, but I think the company would already have issued a profit warning if earnings were going to be much lower than expected.

DOCS shares are now trading on just 11 times 2022/23 forecast earnings. That looks cheap to me for such a classic brand. I’m definitely interested.

A 166-year-old growth stock!

Morgan Advanced Materials (LSE: MGAM) can trace its roots back to 1856, when the Morgan brothers started making crucibles at their factory in London.

Today the company makes a much wider range of industrial ceramics and other parts. One key market today is renewable energy. The company’s products are used in both wind turbines and solar panels.

Industrial concerns like this one can suffer during recessions. Rising costs are also a challenge, but CEO Peter Raby recently said that the company expected to be able to increase prices to match inflation.

Morgan Advanced Materials is below the radar for many investors, but analysts expect earnings to rise by 10% this year. Despite this confident outlook, the shares trade on less than 10 times forecast earnings. That seems cheap to me, especially as there’s also a useful 3.4% dividend yield.

I’ve recently added Morgan Advanced Materials to my portfolio, as I think the stock could outperform from current levels.

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.

Roland Head has positions in Morgan Advanced Materials. The Motley Fool UK has recommended Morgan Advanced Materials. 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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