After soaring 15%, this cheap growth stock looks like a buy to me

Growth stocks often slump before they catch their second wind, and I think that can be a great time to buy.

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Shares in sub-prime lender Amigo Holdings (LSE: AMGO) peaked at 18% higher on Thursday morning on the back of first-half figures. But since flotation in June 2018, even with the day’s uptick, the shares have crashed 75% overall.

Though customer numbers rose by 18%, the firm’s loan book was up 9% and revenue came in 12% ahead, adjusted profit after tax fell by 24% and adjusted EPS was down 31%. But the company said its “full-year guidance for key operating metrics remains unchanged,” and the interim dividend was hiked by a big 66% to reach 3.1p per share.

On today’s share price, we’re looking at a prospective P/E of only 4.1. That’s a very low valuation, but we need to understand the nature of the business.

Guarantor loans

Amigo offers guarantor loans to people with poor credit ratings who can’t borrow from conventional lenders, and it charges an APR of 49.9% for the privilege. That makes me twitch, but it’s at least a lot better than short-term payday loans that can come with an APR of more than 1,000%.

Is that risky? Amigo reported an impairment-to-revenue ratio of 31%, up from 23% a year previously, and that, along with a provision for complaints, is behind the fall in profit. The firm reckons it’s in line with guidance, but it does concern me.

Do I think the shares are a buy? There has to be regulatory risk associated with Amigo, and we’ve seen a number of sub-prime lenders struggling and going under. But I do think the low valuation overplays the risk, and if it wasn’t for personal ethical issues, I think I’d be buying.

Finance techie

Another morning riser that’s caught my eye is Alfa Financial Software (LSE: ALFA), whose shares gained 7.7% approaching noon.

Like Amigo Holdings, the Alfa share price has slumped badly since flotation, currently down 68%. But it’s been edging up gradually in recent months, and since August’s low, we’ve seen a 56% gain.

Alfa is a bit of a blue-sky growth prospect with only modest profits so far, billing itself as “a leading developer of mission-critical software for the asset finance industry,” and that instantly screams caution to me.

Alfa failed to convert early sales through to the profit levels it was expecting, and the crash is exactly what happens when a hot growth stock turns ex-darling.

EPS fell 31% in 2018, and analysts have a further 60% collapse on the cards for this year before things are predicted to level off in 2020. That still puts the shares on a forward P/E of around 36, but new contract wins suggest a turnaround in fortunes might come sooner than expected.

Contracts

On 8 November, Alfa won what chief executive Andrew Denton described as a “high-profile contract with one of the UK’s most ambitious challenger banks.” That was followed on 19 November by another new contract win, this time from “the German subsidiary of a major international bank,” with the bank said to be “one of the largest automotive finance providers in Germany.”

With £53m cash and no debt at the halfway stage at 30 June, Alfa Financial looks in good shape and could be set for a growth rebound. But the valuation is still too rich for my low-risk tastes.

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.

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.

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