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FTSE 100 stalwart Sainsbury’s isn’t the only growth stock I’d buy with £2,000

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Describing J Sainsbury  (LSE: SBRY) as a growth stock may sound rather unusual to a lot of investors. After all, the retailer has delivered three consecutive years of declining earnings. However, with the consumer outlook gradually improving as the pound strengthens, the prospects for the supermarket giant appear to be changing for the better.

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Improving performance

The company in question is industrial LED lighting technology specialist Dialight (LSE: DIA). Its trading update showed that it has been able to continue its focus on addressing operational issues. They have been caused by an incompatibility between its contract manufacturer’s internal systems and the requirements of its product portfolio. However, the company remains upbeat about the potential for improvement in this area, and believes it has the right products and a market with strong growth prospects.

Due to those operational issues, the company’s performance is expected to be second-half weighted. It’s forecast to post a rise in its bottom line of 71% in the current year, followed by further growth of 44% next year. Despite such strong growth prospects, the company trades on a price-to-earnings growth (PEG) ratio of just 0.3, which suggests that it has a wide margin of safety.

Therefore, while its outlook is risky due to the operational issues it faces, Dialight appears to offer an enticing risk/reward ratio. As such, now may be the right time to buy it.

Changing outlook

Similarly, Sainsbury’s could also be worth buying at the present time. Although UK consumers have experienced a difficult recent past due to higher inflation, Tuesday saw news released that wage growth has moved ahead of inflation for the first time in around a year. While the measure of inflation used includes housing costs, it nevertheless highlights that the pressure on consumers may now be easing.

This could be good news for retailers such as Sainsbury’s, with the potential to deliver improving financial performance as a result. The company is already forecast to record a rise in its bottom line of 10% this year, followed by further growth of 7% next year. These figures could gain a boost if consumer confidence improves and it may lead to an upgrade in its outlook.

With Sainsbury’s trading on a PEG ratio of 1.5, it seems to offer excellent value for money. The impact of the Argos acquisition may not yet have been fully felt, and this could lead to a stronger performance from the business over the long run. As such, it appears to offer high returns with relatively low risk due to its current valuation.

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Peter Stephens owns shares of Sainsbury (J). 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.

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