A good example of a growth stock might be a company that is expected to grow its revenue and earnings at a faster rate than the average business within their industry or the market as a whole. These companies often reinvest a significant portion of their profits into the business to fuel further growth, rather than paying out dividends to those who hold the shares.
3i Group
What it does: 3i Group is an investment company with a primary focus on private equity and infrastructure. It invests in mid-market companies.
By Charlie Keough. It has been a volatile couple of years in the stock market. But amid all the chaos, 3i Group (LSE: III) has been a top performer. I reckon its shares still have more to give.
That’s because they look dirt cheap. They trade on a price-to-earnings (P/E) of just 7.6. For comparison, the FTSE 100 average is around 11. What’s more, their forward P/E is just 4.6.
Its share price growth in recent years has been driven by the strong performance of the largest holding in its portfolio, Action.
The Dutch discount retailer makes up around 65% of its portfolio. In its most recent update to investors, 3i reported that Action’s net sales jumped to €3.2bn, fuelled by a 9% rise in like-for-like sales.
With it making up nearly a third of its holdings, that does come with some risk. Its portfolio is unbalanced towards Action. If it experiences a downturn, that could spell trouble for 3i.
But the business has a strong balance sheet to weather a potential storm, including nearly £1.3bn of liquidity.
Charlie Keough does not own shares in 3i Group.
Gamma Communications
What it does: Gamma Communications is a British technology that specialises in communication solutions for businesses.
By Edward Sheldon, CFA. One UK stock that I believe is dirt cheap right now is AIM-listed Gamma Communications (LSE:GAMA). It took a big hit when interest rates rose a few years ago and is yet to fully recover.
This company has a fantastic long-term track record. Between 2018 and 2023, for example, its revenue grew from £285m to £522m (that represents a compound annual growth rate (CAGR) of 13%).
It’s also very profitable. Over that period, return on capital employed (ROCE) averaged 23%.
None of this seems to be reflected in the share price at the moment, however. As I write this, the company’s price-to-earnings (P/E) ratio is only about 18.
Of course, economic conditions in the UK (and Europe) are a risk here. A weak economy could lead to lower demand for Gamma’s services.
All things considered, however, I think the stock is too cheap. It’s worth noting that analysts at Deutsche Bank have a price target of 2,250p, which is miles above the current share price.
Edward Sheldon owns shares in Gamma Communications.
Investec
What it does: Investec provides global financial solutions for high net worth, corporate and institutional clients. It operates principally in the UK and South Africa.
By Harvey Jones. The UK financial services sector has looked undervalued for some years, from FTSE 100 insurers such as Legal & General Group to fund managers such as Schroders.
FTSE 250-listed international banking and wealth manager Investec (LSE: INVP) is another. Trading at just 7.42 times earnings, it’s cheaper than both.
When I spied that lowly valuation, I assumed its shares have had a rough time, but they’ve been on a storming run.
The Investec share price is up 26.56% over one year. Over five years, it’s more than doubled.
Earnings per share jumping 13.3% to 78.1p in 2024, despite macroeconomic uncertainty and persistent market volatility.
Return on equity climbed from 13.7% to 14.6%, above the midpoint of its 12% to 16% target range. The board also completed a £300m share buyback.
I see Investec as a growth stock and recent performance reflects that, but it pays a handsome dividend too. The trailing yield is 6%, covered 2.3 times by earnings.
What all financial services companies need now is a confident, growing economy. Sadly, that’s some way off. However, I think the risks are in reflected in today’s super-low Investec valuation.
Harvey Jones does not own shares in Investec.
ITV
What it does: ITV is the UK’s largest commercial broadcaster as well as producer of popular shows like Love Island.
By Royston Wild. Terrestrial viewers are falling in number as people increasingly choose to stream their favourite programmes at their convenience. But this isn’t taking the wind out of ITV’s (LSE:ITV) sails.
The business has invested heavily in its ITVX streaming platform in recent years. It’s a move that continues to pay off handsomely: the hub’s total streaming hours rose 15% in the first half, while the number of monthly active users increased 17%, to 14.6m.
With further improvements in content, technology and marketing coming down the line, the broadcaster can expect to sustain the platform’s strong momentum.
A fresh downturn in the ad market is a constant threat to company earnings. But the twin engines of ITVX and its heavyweight ITV Studios production arm still makes it a top FTSE 250 stock to consider, in my view.
ITV’s share price has picked up steam as 2024 has rolled on. Yet it still looks dirt cheap on paper, trading on a forward price-to-earnings (P/E) ratio of 8.9. It also deals on a sub-1 price-to-earnings growth (PEG) multiple of 0.5.
These figures are based on City predictions that earnings will soar 17% this year. Further rises of 8% and 10% are forecast for 2025 and 2026 respectively.
Royston Wild does not own shares in ITV.
Playtech
What it does: Platech develops software used by a number of online gambling companies.
By Alan Oscroft. Inflation is falling and the pressure on our pockets is easing. And that could mean a shift back to leisure spending in the next few years, including online gambling.
Why try to work out which of the big operators are likely to do the best, when we could buy shares in a company that makes the software that drives so many of them?
That’s what Playtech (LSE: PTEC) does, and its valuation measures are tasty now. We’re looking at a forward price-to-earnings (P/E) ratio of 11, dropping to 8.7 by 2026.
With earnings expected to double by then, it puts the PEG ratio at 0.2 for the current year, and still as low as 0.6 by 2026. Growth investors often see 0.7 or less as a strong buy sign.
We are at the mercy of gamblers and their whims, mind. And in some parts, authorities are tightening up regulations.
I see a potentially risky, but temptingly cheap, growth prospect here.
Alan Oscroft has no position in Playtech.
