The stock market recovery since last March has been pretty spectacular. But even so, the two growth stocks I want to look at today have delivered above average gains. Both have risen by around 200% over the last 12 months.
I reckon they’re both good businesses. But after such strong gains, are they still cheap enough to buy for my portfolio?
Put on the Warpaint
Cosmetics firm Warpaint London (LSE: W7L) floated on London’s AIM market late in 2016. The company — whose brands include W7 and Technic — initially performed well, but its expansion stumbled, and the stock slumped.
Warpaint’s share price fell from a high of over 265p in late 2018 to hit a low of just 35p last year. The stock has rebounded to around 123p, but long-term shareholders are still in a hole.
Normally, I’d probably dismiss this as an overhyped IPO. But in this case, I think there are reasons to believe this could be a decent growth stock.
One attraction for me is that founders Sam Bazini (CEO) and Eoin Macleod (managing director) each own 25% of the stock. Their interests should be aligned with those of shareholders. I guess they’ve also learned lessons from the firm’s post-IPO problems.
Another attraction is that last year’s performance was better than I might have expected. Despite the months of lockdown, sales for the full year are expected to have fallen by less than 20%. Warpaint has also made progress expanding its distribution channels through Tesco, Amazon and the Five Below store chain in the US.
Although I feel positive about this growth stock, I can’t rule out further problems. I don’t yet know how well Warpaint’s profit margins will recover, nor if sales can continue growing once the reopening boost wears off.
Another risk is that budget brands such as these aren’t always long-lived. More popular alternatives may spring up.
Even so, I think Warpaint looks reasonably valued on 13 times 2021 forecast earnings. There’s also a useful 3% dividend yield. I’m tempted to take a closer look.
A growth stock for the reopening trade?
Prime minister Johnson has been pictured in the papers this week having his first post-lockdown pint. He’s not alone. This should be good news for my second pick today, café/bar operator Loungers (LSE: LGRS).
Loungers has proved a popular growth stock since its flotation in 2019. Although I’ve yet to visit one of the company’s Lounge or Cosy Club outlets, I’m told they’re well run and popular.
The company reopened 47 sites on 12 April and plans to open the remainder of its English sites by 17 May. Including some locations in Wales, the company expects to have 172 sites open by 26 May.
This business is in expansion mode and expects to return to opening 25 new sites each year in 2022.
The only problem I have with this growth stock is the price. At current levels, Loungers’ shares are actually higher than they were before the pandemic. That looks expensive to me, given that the firm issued new shares and took on extra debt last year.
I like the look of Loungers, but I think reopening gains are already priced into the stock. It’s too expensive for me today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Five Below and Tesco and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2022 $120 calls on Five Below, short January 2022 $1940 calls on Amazon, and long January 2022 $115 calls on Five Below. 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.