Why I’m buying these 2 beaten-down growth stocks before the market recovers

Andrew Woods highlights two growth stocks that he’s buying at low levels in advance of a potential stock market recovery.

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Over recent months, the stock market has declined as rising interest rates and surging energy costs bite at investors. While we’re in this market dip, I’ve found two beaten-down growth stocks to add to my portfolio. Let’s take a closer look.

Chocolate heaven

The shares in Hotel Chocolat (LSE:HOTC) have fallen 63% in the past year, while in the last month they’re down 54%. At the time of writing, they’re trading at 138p.

Prior to the pandemic, the up-market chocolate company reported consistent growth in pre-tax profit

Year (ended June)Pre-tax profit/(loss)
2017£11.21m
2018£12.71m
2019£14.05m
2020(£7.45m)
2021£7.82m

As we can see, the firm posted a pre-tax loss of £7.45m for the year ended June 2020. This was chiefly a result of the closure of shops during the pandemic. It’s now battling more current issues, like wage inflation and potential price rises in raw materials used as ingredients.

However, the business largely has control over its own supply chain, producing its own cocoa from trees it grows in St. Lucia, in the Caribbean. This could give the company a tactical advantage over competitors who may face supply chain issues.

In results released last week, however, the business stated that it was concerned because of rising costs and wage inflation. Despite this, it posted a 37% higher revenue for the year ended June 2022. What’s more, it’s financially stable with a cash balance of £17m. 

Growing software

dotDigital (LSE:DOTD) has similarly seen its share price plunge recently. In the past year, it’s down 69%, while over the last three months it’s fallen 9%. At the moment, the shares are trading at 92.4p.

The marketing software platform released its results for the year ended June in the past week. Revenue was in line with previous guidance, with a final figure of £62.8m. This was higher than the previous year, which was £58.1m.

Furthermore, average revenue per customer was up 17%, year on year, while 94% was recurring revenue. This was an improvement from 2021, when this figure stood at 93%.

The business did, however, highlight the uncertainty within the broader economic environment. There is the risk, for instance, that the firm loses customers who can no longer afford its services.

On the other hand, the company signed a deal in March with online security giant McAfee. This will last for at least two years and could give dotDigital an opportunity to expand its clientele on a global scale.

Overall, these two growth stocks have seen their share prices fall dramatically over the past year. I think there’s a good chance that the market will recover in the long run and that this could be an ideal time for me to pick up the shares at low levels. I will add these two firms to my portfolio soon.

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 considered so you should consider taking independent financial advice.

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Hotel Chocolat and dotDigital Group. 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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