2 dirt cheap growth stocks with heaps of potential!

These two growth stocks are currently trading some way below their highs, but they’ve also got bags of potential. Dr James Fox explains why.

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I know investors who have lost a lot of money on growth stocks. These are stocks we expect to grow earnings at a faster pace than the rest of the market and, as such, they receive a premium valuation.

But if they don’t deliver the expected growth, these stocks come crashing down. As such, they carry more risk than mature investments.

So today, I’m talking about two attractively-priced growth stocks. Personally, I don’t think it’s that easy to find competitively-priced growth stocks in the current market. One reason for this is the buzz around artificial intelligence (AI) — it’s attracted a lot of money into stocks with anything to do with AI.

Growth stocks from China

Chinese companies, even those listed in the US, tend to trade at a discount to their international peers. Geopolitics is one reason for this as investors worry whether these Chinese companies could be punished by US-China trade wars. After all, the recently passed ‘Protecting Americans from Foreign Adversary Controlled Applications Act’ is an effective ban or forced sale of TikTok from its parent company ByteDance.

Likewise, investors are wary of Chinese accounting standards (CAS). These originated in a socialist era, focusing on state control rather than investor needs, and they can be less transparent than international investors are used to. On occasion, the figures have been outright manipulated.

Li Auto (NASDAQ:LI) and GigaCloud (NASDAQ:GCT) are two Chinese growth stocks I like, and they trade at huge premiums to their US peers. The discounts reflect the above reasons but, in my opinion, they’re far too cheap.

Meet Li and GigaCloud

Neither company operates in a highly-regulated space like tech and, as far as I know, aren’t recipients of state funding. If the US were to advance its trade programme against Chinese companies, I wouldn’t expect Li Auto or GigaCloud to be a target.

For context, Li Auto produces new energy vehicles (NEVs), and it’s the first of China’s NEV manufacturers to turn a profit. It reached profitability by focusing on Extended Range Electric Vehicles (EREVs — essentially hybrids), and is now bringing out a range of battery electric vehicles (BEVs), which have impressive range and charging times.

GigaCloud doesn’t operate in the cloud space. It connects furniture manufacturers in China with end markets in North America and Europe. Concerns that its operations had been overstated were recently relaxed after an investment researcher conducted an interview with the CEO.

Growth at a discount

Li and GigaCloud offer access to faster-growing companies at a discount to their American peers.

Li Auto’s stock currently trades at 14.6 times earnings. For context, this is in line with the average price-to-earnings ratio of the FTSE 100 — which really doesn’t have much in the way of growth stocks.

Given the company’s growth trajectory, Li is phenomenally cheap. It’s prudent to be concerned by the slowdown in China’s EV sales, but I’m hopeful it’s just a blip. Earnings are expected to grow at 19.3% annually over the next three-to-five years.

Meanwhile, GigaCloud trades at 11.3 times forward earnings, with earnings expected to grow by around 20% annually over the medium term. GigaCloud may face headwinds because of maritime disruption but, currently, the Panama drought and Bab-el-Mandeb crises haven’t had a huge impact.

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.

James Fox has positions in GigaCloud Technology Inc. and Li Auto Inc. The Motley Fool UK has no position in any of the shares mentioned. 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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