Growth stocks are companies tipped to increase earnings at a higher rate than the broader market.
By investing in such businesses, investors have a chance to enjoy spectacular returns. This is because growth shares have the potential to deliver significant capital appreciation as their share prices boom in line with profits.
Adopting a growth investing strategy does have its dangers. Such stocks often have high price-to-earnings (P/E) ratios owing to their terrific profits potential. Yet these high valuations mean that even the slightest slice of negative information can prompt a severe share price fall.
Investors can eliminate this risk by buying stocks that trade on low earnings multiples. This limits the potential share price downside if news flow surrounding the company suddenly disappoints.
With this in mind, here are two dirt cheap growth stocks worth a close look today.
Going for gold
Gold miner Pan African Resources (LSE:PAF) has enjoyed stunning share price gains in 2024. This reflects a soaring yellow metal price, which last month hit a fresh record of $2,364 an ounce.
Yet on paper, this AIM business still offers stunning value. City analysts expect earnings to rise 10% this financial year (to June). This leaves it trading on a forward price-to-earnings (P/E) ratio of 6.8 times.
This projection also means Pan African trades on a price-to-earnings growth (PEG) ratio of 0.7. Any reading below 1 indicates a share’s undervalued.
This year’s bright forecasts reflect the current strength of gold prices. But the South African miner isn’t expected to be a flash in the pan. It’s expected to deliver strong and sustained growth.
Earnings here are tipped to soar 25% in financial 2025, and by another 22% the following year. These bright forecasts reflect Pan African’s plans to raise annual gold production by as much as 25% from current levels.
There’s no guarantee that metal prices will continue rising, of course. In fact, any decline could have significant impact on gold sector earnings.
Yet with inflationary pressures persisting, and fears over the economic and political landscape worsening, there’s good reason to expect gold prices to continue rising.
Off the chain
Industrial chain-maker Renold (LSE:RNO) is another AIM-listed share on a roll right now. Last month, it said trading for the year to March 2024 was “materially ahead” of expectations, news that sent its share price through the roof.
Renold makes products for the mining, manufacturing, energy and transportation sectors, among others. And City analysts are expecting profits to accelerate as the global economy improves.
Earnings growth of 8% and 12% are forecast for financial 2024 and 2025 respectively. The engineer has exceptional opportunities to increase profits beyond this period too, thanks to phenomena like increasing urbanisation, automation and food production, as well as the rise of renewable energy and e-commerce.
I don’t think these are reflected in Renold’s rock-bottom valuation. Today, it trades on a forward P/E ratio of 7.5 times.
The company’s debt is much higher than I’d like. But this is falling and came in at £24.9m as of March. On balance, I think this growth share’s worth a close look today.
