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There has been something of a retreat to safety lately, which has pushed down the valuations of some growth stocks.
I see it as a buying opportunity for my portfolio. Below are two stocks that I believe are well positioned to outperform the market over the next decade, due to a combination of strong growth potential and attractive valuations.
Capital S4
One of the actions that I have been most excited about in recent years is the network of digital media advertising agencies. Capital S4 (LSE: SFOR).
S4 certainly delivered dramatic stock price growth for a while. But like the Grand Duke of York, he climbed the hill only to come a long way down. Delays last year in releasing final results sent the shares tumbling and they have been struggling to make up ground ever since.
That’s not only frustrating for shareholders, it also poses a threat to the company’s growth. Such growth was aided by partially equity-financed acquisitions. Management plans to wait until the share price returns to the level it was before last year’s earnings debacle before reusing the stock as currency for new acquisitions.
Despite the share price collapse (64% last year alone), I think the outlook for S4 Capital’s business remains strong.
Results for the full year will be released later this month. The company has already said comparable annual net revenue growth should be around 25%. That is amazing.
I think a lot of people still don’t fully appreciate the appeal of the S4 business model. Their technological focus means there is a risk of a slowdown in the big digital brands. On the other hand, any such slowdown could lead customers to focus on efficiency, which could help drive more business in the direction of S4.
S4 has a strong collection of assets in the digital space. I think it can continue to grow strongly in the coming years, even if the economy is weak. The current market capitalization of less than £1bn does not fully reflect this.
This month I have been using the weakness in the stock price to increase my current position.
Sports
If I had extra money to invest right now, I would use the February/March drop in the Sports (LSE: JD) to add more growth stocks to my portfolio.
The stock is up 9% over the last year, but I think it’s still a good price. The company has a market capitalization of £8.4 billion. That seems undemanding for a company that expects to top £1bn in pre-tax profit and one-off items this year.
I think things could get even better from here. JD has a long history of strong growth and has laid out its strategy to continue to generate increased revenue and hopefully profit. That includes ambitious plans to open hundreds of new stores each year, along with the company’s sizable digital operation.
Inflation is a risk to profit margins. The expansion program could saddle the company with costly real estate obligations at a time when economic conditions mean consumers have less extra money to spend.
But I like JD’s tried-and-true retail formula, its constant ambition, and its global reach. I think the stock looks undervalued relative to its long-term potential.
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