Lately there has been something of a retreat to safety, pushing down the valuations of some growth stocks.
I see that as a buying opportunity for my portfolio. Below are two shares I think look well-positioned to outperform the market over the coming decade, due to a combination of strong growth potential and attractive valuations.
S4 Capital
One of the stocks I have been most excited about over the past couple of years is digital media advertising agency network S4 Capital (LSE: SFOR).
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S4 certainly delivered dramatic share price growth for a while. But like the Grand Old Duke of York, it marched up the hill only to march a long way back down again. Last year’s delays in publishing final results saw the shares tumble and they have been struggling to regain ground ever since.
That is not only frustrating for shareholders, it also poses a threat to growth at the company. Such growth was helped by acquisitions partly funded with shares. Management plans to wait until the share price returns to the level it was at ahead of last year’s results debacle before using shares as currency for new acquisitions again.
Despite the share price collapse – 64% in the past year alone — I think the outlook for S4 Capital’s business remains strong.
Full-year results are due towards the end of this month. The company has already said that like-for-like annual net revenue growth should be around 25%. That is impressive.
I think a lot of people still do not fully appreciate the attractiveness of S4’s business model. Its tech focus does mean there is a risk from a slowdown at large digital brands. On the other hand, any such slowdown might actually lead clients to focus on efficiency, potentially helping push more business in S4’s direction.
S4 has a strong collection of assets in the digital space. I think it can continue to grow strongly in years to come even if the economy is weak. The current market capitalisation of under £1bn does not fully reflect this.
This month I have been using the share price weakness to add to my existing position.
JD Sports
If I had spare cash to invest right now, I would use the February/March fall in the JD Sports (LSE: JD) price to add more of this growth stock to my portfolio.
The shares have moved up 9% over the past year but I think that still represents a good price. The company has a market capitalisation of £8.4bn. That looks undemanding for a business that expects to top £1bn in headline profits before tax and exceptional items this year.
I think things could get even better from here. JD has a long history of strong growth and has unveiled its strategy to keep delivering an increase in revenues and hopefully profits. That includes ambitious plans to open hundreds of new shops each year, alongside the company’s sizeable digital operation.
Inflation is a risk to profit margins. The expansion programme might burden the company with costly real estate obligations at a time when economic conditions mean consumers have less spare cash to spend.
But I like JD’s proven yet simple retail formula, its ongoing ambition and global reach. I think the stock looks undervalued relative to its long-term potential.
