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2 cheap growth stocks I wouldn’t touch with a bargepole

Shares of Jackpotjoy (LSE: JPJ) — formerly Toronto-listed Intertain Group — are trading 2% higher following the release of its first-half results today.

The company, which describes itself as “the largest online bingo-led operator in the world,” posted strong growth in revenue (13%) and adjusted EBITDA (15%) for the six months to 30 June. And there was an impressive acceleration of growth in Q2, with revenue increasing by 17% and adjusted EBITDA by 28%.

Despite the strong performance and the shares trading at a new high of 680p, a company-commissioned research report published this morning suggested “the stock trades at a significant discount to peers” and advised “we would expect a re-rating as the market regains confidence in the business.”

Lack of confidence

On the face of it, a forecast P/E of 7.1, falling to 6.1 next year, is dirt-cheap. So, what’s behind the market’s lack of confidence?

It may be lingering doubts about Jackpotjoy’s antecedents as Intertain when it came under attack in a report by short-sellers Spruce Point. An independent committee appointed by Intertain dismissed most of Spruce Point’s allegations but the upshot was a major boardroom overhaul and a decision to change the company’s name to Jackpotjoy and move its listing to London.

Chief financial officer Keith Laslop survived the purge, having also previously emerged little scathed as a director and chief operating officer of the somewhat notorious Gerova Financial. He had rubbed shoulders (as a defendant in a civil lawsuit but not in a subsequent criminal trial) with Gerova fraudsters Jason Galanis and Gary Hirst.

Then again, perhaps some investors are concerned by Jackpotjoy’s still-high level of debt, its lossmaking statutory profit numbers or simply the business dynamics of online bingo. At any rate, I see the company as sufficiently problematic to put it on my list of stocks to avoid.

Cunning plan

At a current price of 59p, shares of Tungsten (LSE: TUNG) are 85% down from their September 2014 high of 400p, despite the company’s revenue having increased threefold in the intervening period.

Tungsten was founded by City financier Edi Truell and raised £160m in 2013. It bought a long-time lossmaking and near insolvent US e-invoicing firm for £101m. The firm as it stood was worth next to nothing — Tungsten booked £98.7m as goodwill — but Truell had a cunning plan to use its large database of buyers and suppliers to create a lucrative invoice discounting business, offering early payment facilities to suppliers. To which end Tungsten also acquired a subsidiary of an Israeli bank for £30m.

In search of a profit

To cut a long story short, Truell subsequently departed, the company sold the bank in favour of third-party financing and the financing business still hasn’t taken off, with Tungsten reporting revenue of just £152,000 in its latest financial year.

New management has had some success in bumping up prices in the e-invoicing business and flogging customers add-ons such as spend analytics. A decreased EBITDA loss to £11.8m from £16.2m was hailed as progress but it was helped by the company capitalising software development costs (£3.6m) for the first time in its history.

Tungsten remains a company in search of a way to make a profit and an impairment of that £98.7m goodwill is surely overdue. It remains firmly on my list of stocks to avoid.

Am I making a big mistake?

Of course, Jackpotjoy and Tungsten could make a mockery of my caution by going on to be big winners. However, I'm not sure missing out in these circumstances is one of the worst mistakes an investor can make. Indeed, I'm more concerned about avoiding the missteps the Motley Fool's experts have published in a FREE report called The Worst Mistakes Investors Make.

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G A Chester 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.