Growth stocks typically do well when the broader economy is performing. Therefore, it’s little surprise there are some stocks that fell significantly in value last year, due to concerns about global growth. However, it does now present an opportunity for me to pick up some bargains when I look at valuations. Here are two I like right now.
Never going out of fashion
One company that has suffered over the past year is ASOS (LSE:ASC). The global digital fashion retailer experienced a drop of 60% in the share price over the last 12 months.
In the last full financial year, it flipped from a pre-tax profit of £177.1m in 2021 to a loss of £31.9m. The chairman commented that the business was continuing to face a “highly uncertain economic and geopolitical environment”.
It’s true that 2022 was a difficult year for the firm. However, the long-term growth of the business over the past five years leads me to conclude that this is more of a blip than a material problem going forward.
When considering the valuation, I can’t use the price-to-earnings ratio as ASOS posted a loss. However, I can compare the market capitalisation to the enterprise value (another value tool). The market-cap is £808m, whereas the enterprise value is £1.18bn! This could indicate the share price is too low, reflected in the market-cap discrepancy.
One concern I do have is the competitive sector ASOS operates in. It’s all about who and what is hot right now. Firms can (and do) get left in the dust if they can’t keep pace.
What’s up Doc?
The next stock is Dr Martens (LSE:DOCS). This is a company that has generated a lot of attention in recent weeks, with the share price falling 27% in the past month. This means that over the past year, the stock is down 44%.
The main reason for this negative movement in the short term comes from a profit warning issued last month. It flagged up “significant operational issues” at the main distribution centre in the US. Even though this is incredibly frustrating, it’s a problem that can (and should) be resolved in coming months.
Even with this warning, it still expects to be profitable, with revenue anticipated to grow by 11-13% versus last year.
This makes me feel that the dip in the share price could allow me to snag a bargain now. The price-to-earnings ratio is at 8.46 following the drop, below my fair value of 10, and quite low for a top growth stock.
Clearly, I could be mistaken on the size of the operational problems. If this mushrooms into a larger issue, the impact could last into 2024. This would hamper any rally in the share.
But when I get some spare funds, I’ll want to invest in both ideas.
