These FTSE 350 growth stocks look dangerously overvalued

The problems associated with Brexit are now beginning to take effect. Weak sterling has been present for a number of months, and this is now a contributing factor to the higher rate of inflation. Since this is now outpacing wage growth, consumer spending could come under pressure. This may hurt the share prices of UK-focused, discretionary consumer stocks such as these two FTSE 350 incumbents.

High price

Reporting on Thursday was cinema company Cineworld (LSE: CINE). Its performance in the calendar year to 11 May was positive, delivering a rise in total revenue of 15.8%. This was due to strong admissions growth across its various regions. In turn, that was positively impacted by the attractiveness of the film slate, the group’s new openings in the prior year, and the results from the company’s refurbishment programme. This contributed to a rise in box office revenue of 15.9%.

Retail revenue also moved higher, increasing 19.7%. This was aided by higher admissions, as well as the opening of new Starbucks outlets and VIP sites. Other income increased by a lower 7.5% due to a particularly strong comparative period.

While the company’s performance has been strong, its profitability outlook for the next couple of years is less so. Although growth in earnings of 7-8% per annum is in line with the market average, Cineworld’s valuation suggests it is a faster-growing company than it really is. For example, it has a price-to-earnings growth (PEG) ratio of 2.1, which suggests that ahead of a potentially difficult period for the UK economy, its shares may be worth avoiding.

Difficult outlook

Also facing a potentially difficult period are shares in Restaurant Group (LSE: RTN).  As discussed, inflation is now ahead of wage growth and this may lead to lower consumer spending on non-essentials, such as dining out. This is a key reason why Restaurant Group is expected to report a fall in its bottom line of 18% in the current year. Although its earnings are due to rise by 6% next year, there is clear scope for a downgrade between now and then. With inflation due to move higher over the coming months, it would be unsurprising for 2018 to be another difficult year for the business.

Despite this uncertain outlook, Restaurant Group continues to trade on a relatively high valuation. For example, it has a P/E ratio of 15.2, which suggests its shares are overvalued at the present time. Certainly, its current strategy may help it to perform well on a relative basis, but since its shares are priced for above-average growth, it could continue the trend which has seen its share price decline by 10% in the last six months. As such, it seems to be a stock worth selling rather than buying at the present time.

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Peter Stephens has no position in any shares mentioned. 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.