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Why these super growth stocks could be too cheap to ignore

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Only a handful of growth stocks make it big. And even fewer manage to recover successfully after suffering big setbacks. Today I’m looking at one company that appears to be on the cusp of delivering a stunning turnaround.

Digital advertising specialist RhythmOne (LSE: RTHM) was formerly known as Blinkx. The group’s shares have lost 55% of their value over the last year, but figures released by the company today have sent the stock up by 17%. I believe there could be more to come.

Profit up by 900%

RhythmOne’s sales are expected to have risen by 71% to $255m for the year ending 31 March. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for the year are expected to be 900% higher, at $14m.

Although adjusted EBITDA is the most flexible and generous measure of profit a company can use, the size of this increase suggests to me that the group really has made good progress towards a return to bottom-line profitability.

I’m also encouraged by operational metrics published today. These show that the average rate the company received for displaying its adverts rose from $1.76/thousand impressions to $2.84/thousand impressions last year.

Too cheap to ignore?

Chief executive Ted Hastings said today that the company is “fully in line with current consensus estimates” for 2019. The latest forecasts provided by the data service I use suggest that RhythmOne will report an adjusted net profit $44m for 2019, helped by a full year’s contribution from recent acquisition YuMe.

Even after today’s gains, these forecasts put the stock on a forecast P/E of just 5.7 for 2018/19. Although I’d like to see more detailed figures before making an investment decision, if recent performance is sustainable, I’d expect these shares to trade on a much higher rating in the future. They could be too cheap to ignore.

This is how you do it

Property listing website Rightmove (LSE: RMV) is the undisputed number one in this sector. Its 73% market share of internet traffic for property listings has made it amazingly profitable. Estate agents can’t afford not to list their properties on the site.

Rightmove’s dominance allows the company to raise prices regularly and maintain very high profit margins. In 2017, the group’s operating margin was 73% and it generated a return on capital employed (ROCE) of 1,020% in 2017. That’s a staggering figure. It means that last year’s profits were 10 times greater than the amount of money invested in the business.

I’d normally consider a ROCE of more than 15% to be high. So you can see that Rightmove is in a different league.

Still cheap enough to buy?

Last year Rightmove returned £140.4m to shareholders through a mix of dividends and buybacks. At the current share price of 4,462p, that’s equivalent to a total yield of about 3.5%.

The dividend yield itself is much lower, at about 1.4%. But the advantage of buybacks to companies with stable profits is that they increase earnings per share. This means that a firm’s share price can rise faster than its profits, without the stock becoming too expensive.

I’d prefer to buy these shares during a market slump. But in my opinion, today’s forecast P/E of 25 may not be too much to pay for such a profitable business. For investors looking for a sustainable mix of dividends and growth, Rightmove could be worth considering.

Capital Gains

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. 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.