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I see a top small-cap growth buy here, after a 20% share price fall

In July last year, I saw Luceco (LSE: LUCE) as a fallen growth stock that could be set for a rebound.

Shares in the lighting specialist duly went on to fall further. But they started to turn upwards in July, and by market close last week they’d gained 34% since my earlier comments. However, the share price lost 20% Monday morning, reversing a lot of that gain.

There’s no bad news from the company. In fact, the firm has only recently upped its guidance for 2019 and 2020. So why the sudden fall?

There is speculation that concerns about the impact of the coronavirus threat have hurt the shares, as Luceco has factories in China and elsewhere in Southeast Asia. The firm itself has said nothing about the outbreak, China, or the share price movement, but others operating in the region have commented.

Closed factories

Volex (LSE: VLX) makes high-tech interconnect products, including fibre-optic, high-speed copper, and radio frequency assemblies. Four of its 14 manufacturing plants are in China.

On Monday, Volex told us that “all major operations in China have been subject to an extended and mandatory closure over the Chinese New Year holiday period.”

The closures, however, do seem to be temporary, at least for now. One site has already “resumed operations at a reduced capacity.” The firm needs approval from Chinese authorities to reopen the others.

The Volex share price had been climbing, but since a peak near the end of January it has fallen 17%. That drop has left the shares on a price-to-earnings ratio of 10.7, which has me interested. That’s on estimates for the year to March, and forecasts for the next year would drop that to only around 9.8.

Volex is not saddled with debt, with a net cash position at 29 September, after reporting strengthening cash flow. At today’s share price, even after last year’s gains, Volex is looking tempting to me.

Bigger growth

But back to Luceco. Its shares are on a higher growth valuation, which could lie behind the bigger price fall. Here we’re looking at a price-to-earnings of 17 based on 2019 expectations. But EPS growth forecasts would drop that to around 12 by 2021. And that looks like decent value for a growth stock to me.

Luceco does not, however, enjoy Volex’s debt-free status. In that January update, the company spoke of closing net debt of approximately 1.0 times adjusted EBITDA, which is down from 2.2 times a year previously. It describes that as “comfortably at the lower end of the Group’s targeted range of 1.0–2.0 times.

I’m happy with that, and I don’t see it as much of a threat. I like the look of both these companies.

Risk?

Is there greater risk from further possible manufacturing closures? Yes, there has to be. But, while it grieves me to think of the coronavirus victims, I don’t expect any long-term effect on these growth stocks.

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Alan Oscroft has no position in any of the 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.