In general, quality growth stocks often come with prices to match. That’s not unreasonable and – as Warren Buffett says – buying a wonderful company at a fair price is better than the other way around.
The best opportunities though, are shares in growing businesses that trade at bargain prices. And for investors who are willing to look beyond the major names, I think there are a couple that stand out.
Porvair
Shares in Porvair (LSE:PRV) have really struggled in August, but the company’s long-term competitive advantages still seem to be intact. To my mind, that makes a really exciting proposition.
The company makes filtration equipment for a variety of end markets, including aerospace, laboratories, and petrochemicals. And the barriers to entry for competitors are huge.
Porvair focuses on products that are either mandated or regularly replaced. This generates repeat business and makes it almost impossible for customers to switch to alternative suppliers.
The risk with this type of business is that these end markets can be highly cyclical. This manifested itself during the pandemic in the case of aerospace and more recently with weak demand for lab equipment.
There’s not much Porvair can do about this. But its shareholders can try to limit the investment risk by buying the stock at a good price.
With the shares trading at a forward price-to-earnings (P/E) multiple below 16, I think the time is now. That’s why the stock is on my list to buy in September.
Five Below
It’s been a strange few days for Five Below (NASDAQ:FIVE). The stock jumped after its own earnings report, but fell back after fellow discount retailer Dollar General warned about consumer weakness.
After all that, the stock is back in territory where I’ve been buying it recently – at a P/E ratio of around 15. So I’m looking to add to my investment this month.
Five Below has been struggling with weak like-for-like sales as US consumers – particularly those with the lowest household incomes – cut back on their spending. The risk is that this might continue.
In the short term, however, the company has a way of limiting the damage. It’s attempting to increase its store count by about 12% per year for the next few years.
With the average store breaking even within a year, the firm has been able to fund its growth without taking debt onto its balance sheet. That puts it in a strong position to weather a cyclical downturn.
Over the long term, I think the company’s low prices will prove durable. And rapid store expansion means I’m expecting strong growth for what is currently a pretty reasonable price.
Market timing?
I’m not a believer in trying to time the market. But I do think it’s wise to pay attention to which stocks are unusually cheap.
Sometimes, these can be extremely high-quality businesses that are going through short-term difficulties. And when that happens, there can be great opportunities for investors.
That’s what I think has been happening with Porvair and Five Below recently. They operate in different industries and different countries, but the same core of growth at reasonable prices is still there.
