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One stunning growth stock I’d buy before Tullow Oil plc

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Silhouette of an oil rig
Image source: Getty Images.

With oil prices steadily rising in recent months, the share price of embattled African producer Tullow Oil (LSE: TLW) has unsurprisingly surged nearly 50% higher since the beginning of September. But while the rally in crude prices may have further room to run, I’ve instead got my eyes on under-the-radar growth superstar 4imprint (LSE: FOUR) in 2018.

Have we missed the rally? 

While Tullow will certainly benefit from the rebound in oil prices, I still don’t see the company as a fantastic long-term investment. Part of my reasoning is the inherent cyclicality of the oil and gas industry, which makes it hard for investors to time their entry into the market.

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In addition, it also makes it difficult for industry management teams to make investment decisions, as seen by Tullow’s nearly disastrous multi-billion dollar investments in new fields when oil prices were peaking well above $100/bbl in the mid 2010’s.

The company is slowly repairing the damage these ill-timed investments made, but management still expects net debt to be $3.5bn at year-end, even after a $790m rights issue earlier in the year and rising cash flow from higher oil prices. With this level of net debt supposed to be near 3 times full year pre-exploration investment EBITDA, investors are still a long way from receiving big dividends any time soon.

And with no dividends to cushion the blow of highly volatile earnings, Tullow’s current valuation of 12.4 times 2018 earnings, which is pricier than larger, more profitable rivals such as BP, is very unappealing to me. It certainly looks as though Tullow’s current valuation has fully captured the recent uptick in oil prices and with future prices as uncertain as ever, I’m looking for more dependability from my investments.

You can put a price on consistency 

That’s why I’m interested in 4imprint, which makes items such as pens, coffee mugs and clothes for UK and US companies that want their name on promotional gear. The group has been growing at an astounding clip in recent years with its full-year trading update released this morning showing revenue leaping from $332.94m in 2013 to $627.5m in 2017.

This success has been driven by good old-fashioned organic growth, fuelled by wise investments in marketing to build brand awareness in a highly fragmented market in which it is now the leading player. That said, the company estimates it still only controls 2% of the massive North American market for its products. This should make growth investors giddy as it leaves open the possibility of continued double-digit sales rises for many years to come.

And the group’s management team isn’t chasing growth in a reckless manner either. Since 2013 operating margins have increased from 4.7% to 6.2% and the company has consistently had a strong net cash position with a full $30.7m in the bank at year-end.

While the group’s short-term prospects are reliant on a buoyant US economy, we can’t accurately predict when the next downturn will come. And in the meantime, 4imprint’s rising margins, capable management team, huge growth opportunities and the boost it’ll receive from the US tax cut make the business look keenly valued to me, even at its current valuation of 22 times forecast 2018 earnings.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended BP. 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.

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