Finding multi-bagger growth stocks is a difficult but not impossible process. Buying stocks that are both cheap and have an impressive record of growth behind them, as well as being primed for future growth, is a surefire way to make sure you’re on the right track. Here are two companies that meet these criteria.
Shares in Redrow (LSE: RDW) have been on a tremendous run over the past 12 months. The shares are up 42% since the beginning of April 2016, and there could be further gains to come.
Over the past five years, the company has grown earnings per share at a compound annual rate of 65.3%, and while analysts expect the company’s growth to slow over the next two years, the slowdown is not expected to be as violent as its current valuation suggests.
Indeed, City analysts have pencilled-in earnings per share growth for the company’s financial year ending 30 June 2017 of 21% and 8% for the following fiscal year. However, despite the double-digit growth rate expected, the shares only trade at a forward P/E of 7.8, which gives a PEG ratio of 0.4. A PEG ratio of less than one signals the shares offer growth at a reasonable price.
And based on Redrow’s historic valuations, there is a chance shares in the company could double from current levels. Over the past five years, the shares have traded at an average P/E of 11. A return to this multiple implies a share price of 736p. If the shares were to return to their all-time high valuation of 14 times earnings, they could trade as high as 1,013p on 2018 estimated earnings.
Numis Corporation (LSE: NUM) looks to be another undervalued growth stock that could double over the next few years. The company looks cheap on almost all metrics, despite the fact net profit has grown from a loss of £0.7m in 2011 to a profit of £26.4m for 2016. Substantially all of this profit has gone to the bottom line with net cash growing to £125m by year-end 2016, up nearly 100% from the year-end 2011 figure of £70m. As well as hoarding cash, management has steadily increased the group’s dividend payout and currently, the shares support a dividend yield of 4.9%. The per share payout is up 60% over the past five years.
Nonetheless, despite this impressive growth, cash and income metrics, shares in Numis are dirt cheap compared to the rest of the sector. Based on City expectations shares in the group currently trade at a forward P/E of 10, below the financial sector median of 14.6. Moreover, the shares trade at an EV/EBITDA ratio of 5.2, which is 55% below the sector average of 11.2, indicating that they could more than double in price before the valuation came into line with the sector average.
Overall, Numis’s low valuation and attractive dividend yield make this company an attractive-looking investment.
If it's growth stocks you're after, the Motley Fool's top analysts have recently labelled this stock as one of the market's “top small-caps”.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Redrow. 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.