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If I had £500 to invest in the stock market today, hoping to benefit from the growth prospects of some UK businesses, I would split it between two badly beaten shares.
That makes these two growth stocks look like potential bargains for my portfolio, although I recognize that the higher downside party reflects the significant risks the two companies face.
Buhu
Online retailer Buhu (LSE: BOO) may know a lot about fashion – but its own shares have fallen out of fashion. An 84 percent decline over the past year means the stock price is now more favorable than even the most ardent fan would like.
Bhu faced many problems, some of his own making. Although the company has worked hard to improve its reputation, it continues to suffer from previous complaints about conditions in its supply chain.
A big worry for Boohoo and its competitors is the fear that the economic downturn could cause consumers to spend more on clothing. Meanwhile, inflation threatens profit margins.
But it’s not all doom and gloom, Bhu. I continue to see an investment case here. The company owns famous brands Debenhams And Karen MillenThis can help to maintain the buyer’s attraction.
The business model has previously been proven to be highly profitable. It has a large customer base and deep purchasing knowledge. I see the potential for continued sales growth. Sales grew 14 percent last year.
Buhu’s share price fall also seems overstated to me. I happily add these growth stocks to my portfolio when they trade for pennies.
S4 Capital
Another company that has seen its share price decline over the past year is a digital media agency. S4 Capital (LSE: SFOR).
The company was established by WPP Founder of Sir Martin Sorrell, who has proven his ability to build fast-growing enterprises in advertising. But this year the crop has come for several reasons.
Repeated delays in publication shook investor confidence, although they did not contain any particular shockwaves at the time of publication. On top of that, rapid expansion has increased costs that threaten profit margins.
Are these teething problems or signs of bigger challenges for the company? S4 Capital’s stock price has fallen 84 percent in a year, suggesting that many investors have fundamentally misjudged the company’s value.
But although I see this year as a difficult time for the company, it has built a large digital advertising business in a few years. I think it’s worth more than today’s stock price.
Growth is associated with growing pains.
Even after lowering its guidance in July, S4 expects 25% like-for-like gross profit and net income growth. That’s a big deal and I think there’s more to come in the future as company acquisitions are fully bedded down and the overall digital marketing market continues to grow.
Spinning costs are a risk to profits and I think the damage done to investor confidence this year may take years to repair. However, accepting the risks, I am happy to invest £250 into S4 Capital shares today.