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2 growth stocks I’m not backing to recover any time soon

Gem Diamonds (LSE: GEMD) flatlined in Thursday business after a less-than-enthusiastic response to the company’s half-year numbers. The stones producer was last at 78p per share and still anchored within spitting distance of August’s record lows.

The South Africa-focused digger announced that revenues fell 15% during January-June, to $92.9m, a result that pushed underlying EBITDA 70% lower to $13m. Gem Diamonds suffered as a result of falling stone prices in the first half — the average price per carat declined to $1,779 from $1,899 a year earlier. But this was not the company’s only problem, of course, with ongoing production problems causing the number of recovered carats to reverse 12% year-on-year to 50,478.

The company announced that its group-wide cost reduction programme is now under way, with $15m worth of annualised efficiency and cost reduction initiatives having been identified already and due to kick in from this October.

In other news, Gem Diamonds announced that it had received an offer for its Ghaghoo mine in Botswana, which has been on care and maintenance since March due to weak demand for the size and quality of output produced by the asset. The company is currently considering the offer, it advised.

In a hole

The share price has remained in a tailspin during the course of 2017 due to difficulties in the global diamond  market.

The company noted that that “the global market for both rough and polished diamonds remained cautious” during January-June, adding that “financing challenges persist and the volatile macroeconomic environment continues to create challenges for the middle diamond market.”

As a result, the City is expecting earnings at the business to topple 83% in 2017, resulting in a massive forward P/E ratio of 44.9 times.

While Gem Diamonds’ may take a more favourable view of the market in the longer term, the current issues hampering stones demand could very well drag on for some time yet. And these compressed diamond prices, combined with lower group output, are heaping huge pressure on the digger’s balance sheet right now. The company had net debt of $14.2m on its books as of June versus cash on hand of $66.5m a year earlier.

I reckon the digger is a risk too far right now.

In the doghouse

I am also less than assured by the investment case of Pets At Home (LSE: PETS) right now.

Latest Office of National Statistics retail sales data for July released today showed sales growth of just 0.3% in July, matching the prior month’s figure. And the story was particularly bad for sellers of non-food goods — demand for inedible products dropped 0.1% last month, the ONS revealed.

And I expect pressure on the likes of Pets At Home to build in the months ahead as the squeeze created by stagnating wage growth and rising inflation worsens. Sure, the company reported a perky 2.7% rise in like-for-like sales during April-June, but I expect this top-line uptick to prove a mere flash in the pan.

The City expects earnings at the Wilmslow business to fall 12% in the year to March 2018, and I reckon share pickers should be braced for extended bottom-line trouble. I for one won’t be investing any time soon despite the retailer’s conventionally-attractive forward P/E ratio of 14.5 times.

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Royston Wild 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.