Buying growth shares provides investors with a chance to book significant capital gains as profits take off.
Snapping them up at low prices can provide even greater share price growth too. The theory is that quality cheap shares can soar in value as the market wises up to their solid fundamentals and rerates them.
Investing in lowly valued growth stocks could be a particularly good idea in these uncertain times. Worsening economic conditions and falling profits could, in theory, limit the scale of any temporary share price reversals.
With this in mind, here are two of my favourite cheap growth shares to consider for next month.
Topps Tiles
Penny stocks such as Topps Tiles (LSE:TPT) can be prone to high bouts of price volatility. But I believe the long-term earnings potential still makes it worth a closer look.
This particular small-cap share has a chance to grow profits as the UK housing market stabilises. As a major supplier of building materials, it can expect demand to rise strongly as homebuilders ramp up construction levels.
I also like Topps’ ambition to capitalise on this through its ‘Mission 365’ growth strategy. It hopes measures like expansion into new products, improving its trade channel, and boosting its online marketplace will increase revenues by around £100m from 2023 levels over the medium term.
Today, the business trades on a price-to-earnings (P/E) ratio of 9.2 times for the financial year to this September, based on City forecasts that annual earnings will soar 58%.
This combination also means the company boasts a price-to-earnings growth (PEG) ratio of 0.2. Any reading below 1 indicates that a share is undervalued.
Topps Tiles faces competitive pressures from retail giants like B&Q and Wickes. Labour costs are also set to rise following the recent Budget. Yet I believe these risks are baked into the company’s low valuation.
Polar Capital Technology Trust
Growth shares can be risky investments due to the elevated valuations they often command. One lukewarm trading statement or signs of sector weakness can cause a firm’s share price to collapse.
Funds like the Polar Capital Technology Trust (LSE:PCT) don’t eliminate this risk. But investment across more than 100 companies helps to balance out this risk.
By investing across various sectors, this particular fund also provides exposure to an array of growth opportunities. Chipmaker Nvidia and software developer Microsoft, for instance, give investors a way to capitalise on the artificial intelligence (AI) boom. The same with carmaker Tesla and self-driving vehicles, and retailer Amazon with e-commerce.
At 367p per share, I think this tech trust offers especially good value today. It trades at a near-9% discount to its net asset value (NAV) per share of 402.6p.
Past performance isn’t a guarantee of future returns. And this growth-focused trust could suffer if economic conditions deteriorate and the broader performance of growth shares follow suit.
But a 19.4% average annual return since early 2015 suggests Polar’s technology trust could be a great way to consider balancing risk and potential profit.
This post was originally published on Motley Fool
