2 top growth stocks trading at bargain valuations

These rare high growth, low valuation stocks are well worth a closer look.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 may have pulled back slightly since Theresa May’s snap general election announcement on Tuesday but valuations across London’s main index are still looking stretched to me. That’s why I’ve been digging into the mid and small-cap indices to find great shares that still trade at reasonable valuations. And I think I’ve found one in fast growing alcohol distributor and retailer Conviviality (LSE: CVR).

A highly reliable industry

Despite rising over 40% in the past year, the company’s shares still trade at a relatively reasonable 14.5 times forward earnings and offer a solid 3.8% dividend yield, all while analysts forecast double-digit earnings growth for this year and next.

These forecasts seem eminently achievable for Conviviality given the company’s high levels of organic growth and big recent acquisitions that have consolidated its position in the alcohol distribution market across the UK. In the half year to October, the company’s revenue rose 4.4% on a like-for-like basis while acquisitions boosted the top line 211% year-on-year and led EBITDA to improve by 252%. Even more impressively, the acquisitions didn’t stretch the balance sheet and in fact lowered net debt to £138m, or 2.19 times EBITDA.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

As these acquisitions are integrated the company expects significant synergies due to lower costs and improved pricing power that comes from serving over 25,000 restaurants, bars and hotels. This means margins, cash flow and earnings should all rise in the coming quarters.

On top of the fast growing distribution business the company also has 716 franchised stores operating under the Bargain Booze and Wine Rack brands. In H1, sales from these outlets rose 2.5% year-on-year reflecting consumers shift towards shopping at small local stores and looking for value.

With good growth in both major business lines, significant cost-cutting potential, well covered dividends and an attractive valuation I believe Conviviality is one growth share investors should keep an eye on.

A riskier option

Another retailer this is growing nicely, offers a solid dividend and trades at a reasonable valuation is pawnbroker H&T (LSE: HAT). The company has recently been shrinking its estate by closing unprofitable stores, which has helped increase earnings by double-digits in each of the past two years.

And although analysts are forecasting earnings increases of 8% and 20% in the next two years respectively, the company’s shares still trade at only 13.5 times forward earnings and bring a 3% yielding dividend.

Even though shrinking the number of stores may seem an odd way to grow, it is working well for H&T as it has allowed management to concentrate on adding additional services such as foreign exchange, online personal loans and electronics buybacks that have proved popular with consumers and profitable. Rising gold prices have also helped boost margins, but while very nice, this is a volatile and unpredictable source of profits in the long term.

The company is also benefitting from increased regulatory scrutiny of the sector by the FCA. This is increasing compliance costs for smaller competitors, which they will have to pass on to competitors. However, large players such as H&T will be able to absorb these costs and expand market share.

H&T is growing nicely, improving margins, maintains a very healthy balance sheet and has plenty of room to increase already substantial dividends. With it shares trading at an attractive valuation, risk-hungry investors may want to take a second look.

British CEO gobbles up £238,000 of own stock

What company does he run?

And why is he so confident in its long-term potential?

This new report - ‘One Top Growth Stock from The Motley Fool’ - reveals the full details, both risks and opportunities. Some of which you may find frankly, unbelievable.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent:

  • Double-digit revenue growth
  • Returns on capital almost 600% the UK average
  • Now, profits are exploding again - up 46% in 1 year!

It’s no wonder insiders are buying this stock hand over fist. Last year, they bought a total £492,000 of shares. And now might be the ideal moment to join them.

So please, don’t miss this report, ‘One Top Growth Stock from The Motley Fool’ Including both risks and opportunities.

Secure your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any 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.

More on Investing Articles

Investing Articles

What’s up with the Lloyds share price?

The Lloyds share price is up 26% in 2025, representing one of the strongest performance on the FTSE 100. Dr…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Here’s how a 40-year-old could start investing £100 per week to retire early

If a 40-year-old decides to start investing today, here's how they could potentially turn £100 a week into over £500k…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

The FTSE 100 is up 60% in 5 years. Here’s why — and a big lesson!

The flagship FTSE 100 index has put in a very strong performance over five years. There's a specific reason for…

Read more »

Investing Articles

How much do investors need in an ISA to earn a £2,500 monthly passive income?

Charlie Carman explores how investors could strive for £30k in tax-free passive income each year from a dividend stock portfolio.

Read more »

Investing Articles

How much would a 45-year-old need to invest in an ISA to earn a £1k monthly passive income at 65?

Harvey Jones looks at how much an investor would need to put away every month to build a steady passive…

Read more »

Investing Articles

3 things to do ahead of the new 2025-26 ISA year

It's time for us all to put on our investing boots and get to work on developing our plans for…

Read more »

Older couple walking in park
Investing Articles

Is £150,000 enough to generate £1,000 a month in passive income?

Stephen Wright takes a look at three UK stocks with dividend yields above 8% that passive income investors might be…

Read more »

Investing Articles

Aim to earn a £50k second income in retirement by investing just this much each month

Even with a small monthly investment, it’s possible to earn a £50k second income with a successful investment strategy and…

Read more »