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UK growth stocks have lost quite a bit of popularity, courtesy of the 2022 correction. However, many of them are now trading at historically low prices as a consequence. And investors today can get a lot more shares in many of these businesses than they could a year ago for the same amount of money.
That is certainly the case for two UK stocks in my portfolio. Both firms have apparently lost a lot of momentum. However, when looking at the underlying fundamentals, these businesses are doing very well, despite operating with various economic headwinds. Let’s take a closer look at why I think these companies are poised for a long-term comeback.
A high growth stock for less than £5?
As the cost of living crisis continues to escalate, discretionary consumer spending has declined significantly over the past 12 months. And that puts a lot of pressure on businesses, especially in the e-commerce sector.
Most companies are busy cutting costs, with marketing budgets first on the chopping block. While this trend is temporary, it puts a lot of pressure on dotDigital Group (LSE:DOTD). The software as a service company provides a digital marketing automation platform. It enables businesses to engage with customers more effectively through email, text, social media, and other avenues of communication.
Today, growth stocks are trading at just 88 pence compared to highs of nearly 300 pence in 2021. As demand waned, so did dotDigital’s top-tier expansion, and its sky-high valuation fell apart. But looking at his latest resultsgrowth is far from stagnating.
Revenue rose 9% to £33.8m, while operating profit suffered 16%. The latter sounds like a problem on the surface, but on closer inspection it stems from increased hiring activity. It turns out that management is so confident in the company’s long-term potential that it is capitalizing on rival layoffs.
While this growth is a long way from 2020 levels, I remain optimistic about the potential for dotDigital. Trading at a P/E ratio of 23, the growth stock is priced significantly below its historical average. And while the group faces fierce competition with much deeper pockets, the company remains debt-free with a platform that has proven to create enormous value for clients.
Invest in infrastructure
Another company that seems to have lost a lot of love lately is shallow companies (LSE: SOM). As a quick reminder, they design, manufacture, and sell laser-guided concrete placing machines. Not the most exciting opportunity, I know. But its portfolio of products has proven exceptionally popular with construction companies both large and small.
In addition to offering a high-quality surface finish, their machines drastically reduce the labor required, significantly lowering operating costs for their customers.
Revenue in 2022 was flat at $133.6 million (£111.05 million). That certainly doesn’t sound like a growth stock. However, it’s worth noting that 2021 fueled some great growth that saw the top line expand by more than 50%. Combine that with continued shortages and delays in Europe and Australia, it’s pretty impressive that Somero managed to keep up with last year’s results, despite all the hurdles. At least, that’s what I think.
Obviously, shipping delays to international markets are problematic, especially if they continue to drag down operations over the long term. But with the stock price being decimated to 350p, sending the P/E ratio down to just 7.5, that’s a risk I think is worth taking.
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