I’ve £1,000 sitting in my trading account, and I’m thinking of using it to buy a growth stock. I have three in mind today, which share two things. All came to market through IPO in the last two years. And all have fallen since flotation.
Shares in The Hut Group (LSE: THG) crashed spectacularly this week. THG shares floated in September 2020, and are now down more than 50%. Most of that has come in the past six weeks, with a 35% slump after the firm’s fateful capital markets day on Tuesday.
My Motley Fool colleague Andy Ross has explained the apparent reasons for the disaster. Maybe it’s down to short selling. Maybe it’s a failure to reassure major investors. Or both? All I’m really interested in now is whether we’ve seen a big overreaction. And whether I should buy.
Two things make me think I shouldn’t. The company is planning to split out its Ingenuity technology division. So soon after flotation, that creates uncertainty. And there’s the unproven prospects for the Ingenuity platform itself — that’s the e-commerce technology the firm sells to online businesses. I do think THG could have a future if it can pick itself up. But, for now, I’ll just watch.
An IPO for boots
I have a personal liking for Dr. Martens (LSE: DOCS), having worn the boots for decades. Trading in the shares commenced in February, and things started off well enough. But the price started slipping in the lead up to June’s full-year results. The stock has now fallen 18% since IPO.
Headline EPS dropped, which might explain the market reaction. But it was due to exceptional IPO costs. The company recorded a 35% increase in adjusted EPS, from a 15% rise in revenue. Adjusted pre-tax profit gained 34%, and operating cash flow was up 65%.
The current Dr. Martens share price gives us a P/E around the 30 mark, based on adjusted EPS. There’s risk that investors might see overvaluation in that, and keep the shares depressed for some time.
Revenue in Q1 this year is up 52% year-on-year, compared to a Covid-hit prior year. And it does suggests that P/E could fall significantly this year. There’s certainly some short-term price risk. But I think I’m seeing a stock on a fair long-term valuation, with a strong brand.
Pig in a space helmet
Moonpig.com (LSE: MOON) has created a strong brand. But is it a business I want to be part of? We’re looking at another February IPO here, with a similar result.
Since listing, the Moonpig share price is down 25%. The business posted strong 2020-21 results in July, and upped its revenue outlook for the 2021-22 year to between £250m and £260m. And since then, in response to a strong start to the current year, it’s lifted the target again. It now expects revenue ranging £270m-£285m.
That’s short of the £368m for the year just ended. But that was down to a pandemic boost. Revenue guidance is now 60% ahead of the 2019-20 year.
Again, I see a risk of share price weakness in the coming year, as investors increasingly see overvaluation among online businesses. So where will my £1,000 go? Moonpig and Dr. Martens are both candidates.
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Alan Oscroft has no position in any of the 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.
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