2 cheap growth stocks that could make you rich
Finding shares which can offer double-digit earnings growth outlooks is never easy. Few companies offer index-beating returns for long, and those that do tend to see their valuations rise significantly. This means that the upside potential for new investors is often limited. However, even with the FTSE 100 trading close to its record high, some growth stocks could be worth buying. Here are two examples; both of which offer double-digit earnings growth at a reasonable price.
Reporting on Tuesday was Radio Frequency semiconductor designer and manufacturer CML Microsystems (LSE: CML). It reported a rise in revenue of 22%, with profit before tax moving 27% higher to £4.2m. This aided cash flow, with the company having a net cash position of £12.5m despite spending £3.6m on the acquisition of Sicomm. This should help fund future growth, as well as leave the potential for further M&A activity.
The company's improving financial performance is at least partly due to the effect of its long-term focus on R&D, as well as the improving strength of the customer relationships which it has. Revenue advances in the long run seem relatively likely due to the long lead time on new products reaching revenue generation. Therefore, past designs could start to bear fruit in future years.
Looking ahead to next year, CML Microsystems is forecast to report a rise in its bottom line of 11%. It is expected to follow this up with growth of 14% in the next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.4, which suggests now could be the perfect time to buy them.
Also offering upbeat growth potential is lighting specialist Dialight(LSE: DIA). It is expected to report a rise in its bottom line of 33% in the current year. This is forecast to be followed with further growth of 48% in the 2018 financial year, which has the potential to improve investor sentiment in the stock.
Despite its strong growth potential, the company trades on a PEG ratio of 0.4, which appears to be cheap given its scope to raise earnings at a rapid rate. Certainly, there is scope for a downgrade to its outlook, but the market seems to have priced this risk in via a low valuation. This means new investors may benefit from a wide margin of safety even after the company's shares have doubled during the last year.
As well as growth potential, Dialight also offers a rapidly rising dividend. Shareholder payouts are expected to increase by 43% next year. While this puts the company's shares on a forward dividend yield of 1%, shareholder payouts are expected to be covered more than five times by profit. This suggests they could increase at a faster rate than earnings and allow the business to eventually become a relatively enticing income stock.
Major growth stock
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Peter Stephens 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.