Are these 2 FTSE 100 growth stocks bargains or value traps?

One of these FTSE 100 (INDEXFTSE: UKX) growth stocks has slumped and the other is wobbling a bit. Is it time to buy or avoid?

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As profit warnings go, the trading update from Bunzl (LSE: BNZL) on 17 April was hardly earth-shattering. Revenue growth had slowed a little, specifically in its North American business which had “experienced slower underlying growth of approximately 1%.”

But it sent the share price down 9% on the day and by 15 May, we’d seen a 19% slump.

The Bunzl price has actually gained 27% over the past five years, while the FTSE 100 has managed only 8%. But that needs to be tempered a little by Bunzl’s modest dividends which have been yielding only around 2%, over a period when the index has been paying more than 4%.

Slowing growth

I think we’re looking at a classic growth share situation, where the end of a strong earnings period sends investors off in search of the next hot thing. After healthy growth over the past few years, EPS is predicted to flatten off, and the latest update Wednesday seems to confirm that.

Bunzl reiterated its previous guidance, speaking of “overall trading consistent with the slowing underlying revenue growth,” reported at the Q1 stage. It suggests first-half revenue will grow by around 2% at constant exchange rates.

This seems like a relatively minor wobble for Bunzl, which looks to me to be in a business that’s nicely defensive against short-term economic squeezes. And on forward P/E multiples of around 16, I’d be tempted to buy… if it weren’t for high levels of debt.

At the end of 2018, Bunzl’s net debt figure stood at two times EBITDA, and that rules it out for me.

Set to fall?

I can’t help wondering if we might be seeing another Bunzl situation coming in the form of Auto Trader (LSE: AUTO), whose share price has more than doubled over the past five years.

It’s impressive growth. But looking at 2019’s price chart, which has shown a rapid start to the year followed by a bit of a fall-off in the past couple of weeks, makes me feel a bit twitchy.

I’m not one for putting much faith in price charts, but one thing I’m increasingly wary of is the classic growth share bubble. And I ask myself if I can see anything in the stock’s fundamentals that could signal the end of the bull run and a downwards re-rating.

More slowing

Looking at forecasts, I think I might. After the digital automotive marketplace provider recorded an 18% rise in EPS for the year to March, the City’s analysts are predicting a slowdown to growth of just 5% this year.

And I’m concerned even that might be too optimistic as motor sales have been falling for both new and used vehicles. Buying a new car involves a big expense for most people, and it’s something folk tend to do when they’re feeling optimistic about their financial situation.

Brexit has already come close to destroying what little economic optimism we had here in the UK, and I really think things could get a lot worse in the next few years, especially if we suffer a no-deal departure from the EU.

Right now, I think piling into growth shares is a poor investment strategy, as they probably have the furthest to fall in any new crunch.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader. 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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