UK growth stocks have lost quite a bit of popularity, courtesy of the 2022 correction. However, as a consequence, many of them are now trading at historically low prices. And investors today can snatch up significantly more shares in many of these businesses than a year ago for the same amount of money.
That’s certainly the case for two UK shares in my portfolio. Both firms have seemingly lost a lot of momentum. Yet looking at the underlying fundamentals, these businesses are chugging along nicely, despite operating with several economic headwinds. Let’s take a closer look at why I think these firms are primed for a long-term comeback.
A top growth stock under £5?
As the cost-of-living crisis continues to heat up, discretionary consumer spending has significantly dropped in the last 12 months. And that’s put a lot of pressure on businesses, especially in the e-commerce sector.
Most firms are busy cutting costs, with marketing budgets first on the chopping block. While this trend is temporary, it’s put a lot of pressure on dotDigital Group (LSE:DOTD). The software-as-a-service company provides a digital marketing automation platform. It enables businesses to engage with customers more effectively through email, text, social media and other communication avenues.
Today, the growth stock trades at just 88p compared to the highs of nearly 300p in 2021. As demand waned, so did dotDigital’s top-line expansion, and its sky-high valuation came crashing down. But looking at its latest results, growth is far from stagnant.
Revenues have jumped 9% to £33.8m while operating profits have suffered by 16%. The latter sounds like trouble on the surface, but on closer inspection stems from increasing hiring activity. As it turns out, management is so confident about the firm’s long-term potential, it’s capitalising on the layoffs of its rivals.
While this growth is a far cry from 2020 levels, I remain optimistic about dotDigital’s potential. Trading at a P/E ratio of 23, the growth stock is priced significantly below its historical average. And while the group faces fierce competition with far deeper pockets, the firm remains debt-free with a platform proven to create enormous value for customers.
Investing in infrastructure
Another company that seems to have lost a lot of love lately is Somero Enterprises (LSE:SOM). As a quick reminder, it designs, manufactures and sells laser-guided concrete laying screed machines. Hardly the most exciting opportunity, I know. But its portfolio of products has proven exceptionally popular among construction companies, both big and small.
Apart from delivering a high-quality surface finish, its machines drastically reduce the required labour, significantly bringing down operating costs for its customers.
Revenue in 2022 came in flat at $133.6m (£111.05m). That certainly doesn’t sound like a growth stock. However, it’s worth pointing out that 2021 pulled forward a lot of growth which saw the top line expand by over 50%. Pairing that with continued shortages and delays in Europe and Australia, it’s pretty impressive that Somero managed to keep up with last year’s results, despite all the headwinds. At least, that’s what I think.
Obviously, shipping delays to international markets are problematic, especially if they continue to drag down operations in the long run. But with the share price being decimated to 350p, sending the P/E ratio to just 7.5, that’s a risk I feel is worth taking.
