If I had a spare £500 to invest in the stock market today hoping to benefit from the growth prospects of some UK businesses, I would split it across a couple of shares that have been badly beaten down in price.
That makes these two growth shares look like possible bargains for my portfolio, although I recognise the steep price falls party reflect significant risks the two firms face.
boohoo
Online retailer boohoo (LSE: BOO) may know a lot about fashion – but its own shares have clearly fallen out of fashion. An 84% reduction over the past year means the share price is now more form-fitting than even the keenest fan would want.
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Boohoo has faced a number of problems, some of its own making. It continues to be dogged by previous complaints about conditions in its supply chain, although the firm has worked hard to improve its reputation.
A bigger worry both for boohoo and rivals is the risk that a recession could lead to shoppers spending less on clothes. Meanwhile, cost inflation threatens profit margins.
But it is not all doom and gloom at boohoo. I continue to see an investment case here. The firm also owns well-known brands such as Debenhams and Karen Millen, which could help it maintain shopper attraction.
It has proven in the past that its business model can make sizeable profits. It has a large customer base and deep buying expertise. I see the potential for ongoing sales growth. Sales last year grew by 14%.
The boohoo share price fall also looks overdone to me. I would happily add these growth shares to my portfolio while they trade for pennies.
S4 Capital
Another company that has seen its share price plummet in the past year is digital media agency S4 Capital (LSE: SFOR).
The company was set up by WPP founder Sir Martin Sorrell, who has proven his ability to build fast-growing enterprises in advertising. But it has come a cropper this year, for several reasons.
Repeated delays in publishing accounts shook investor confidence, even though when they were published they contained no especially nasty shocks. On top of that, rapid expansion has added costs that threaten profit margins.
Are these teething problems or signs of bigger challenges for the company? The S4 Capital share price has tumbled 84% in a year, suggesting many investors have fundamentally reassessed the company’s worth.
But although I see this year as a tough one for the firm, it has nonetheless built a massive digital advertising operation in just a few years. I think that could be more valuable than today’s share price suggests.
Growth shares with growing pains
Even after lowering its guidance in July, S4 expects 25% like-for-like gross profit and net revenue growth. That is substantial and I think there could be more to come in future, as the company’s acquisitions fully bed-in and the total digital marketing market grows.
Spiralling costs remain a risk to profits and I think it may take years for the damage done to investor confidence this year to be repaired. But, accepting the risks, I would be happy to invest £250 into S4 Capital shares today.
