Despite this, the company’s stock price has made strong gains in recent years. It recently traded at its highest level since 2016. However, with what seems to be a low valuation, it could offer further capital growth potential alongside a dirt-cheap stock that reported positive results on Thursday.

Improved strategy

The company releasing upbeat news was tool and equipment hire specialist HSS Hire (LSE: HSS). It released interim results which showed it’s making good progress under a new strategy. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) has risen by 74.7% to £29.9m, with underlying revenue growth of 8.7% showing that the transition to a new distribution model is working well.

The company’s refinancing and the sale of its UK Platforms business appear to have improved its long-term prospects. Its focus on the tool hire business has been a shrewd move, with customer demand increasing – especially for seasonal products.

Looking ahead, HSS Hire is expected to post a significant rise in pre-tax profit in the 2019 financial year. It is due to rise from £1.8m in the current year to £8m, which puts the stock on a forward price-to-earnings (P/E) ratio of around 10. This suggests that it could offer good value for money.

Certainly, it’s still early days in terms of the strategy change it has affected. But with encouraging early signs, it could deliver an improving share price performance.

Low valuation

The prospects for the Next share price also appear to be impressive. The company continues to offer a modest valuation despite it recently trading at a two-year high, having a P/E ratio of around 14.

This suggests that investors have not factored in its future growth potential, with the business expected to report a rise in earnings of 4% in each of the next two financial years. Due in part to the tough operating conditions faced by retailers, this would be a good result – especially given the company’s bricks & mortar focus.

Of course, Next’s online growth potential remains a key catalyst for its financial outlook. It has been able to generate positive online sales growth in recent quarters, which have helped to offset a declining store performance. This trend could continue over the medium term, with shoppers favouring digital over in-store shopping.

With Next being well-placed to transition towards an increasingly online-focused operation, its long-term future appears to be bright. It has a loyal customer base which seems to be less price-conscious than average, while a strong brand could help it deliver improving earnings growth over the medium term. As such, now could be the right time to buy it for the long term.

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Peter Stephens 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.

Gaining traction 

YTD shares in Speedy have gained 5% while shares in HSS have lost 52%. The divergence is a result of the different speeds of the two companies’ turnarounds. As Speedy has made progress, HSS has struggled. Indeed, updates published over the past few weeks sum up the situation well. 

Today, in a brief trading update, Speedy said that group revenues for the period to 31 August, excluding disposals, are approximately 7.5% ahead of the prior year, primarily due to growth in services revenues. Meanwhile, net debt at the half year-end on September 30 is expected to be below £70m, down from £85m, while cost-saving efforts have shaved an estimated £3m from the annual cost base. These developments now mean that profit for the full year is expected to be “to be well ahead of the prior year and slightly ahead of the Board’s previous expectations.”

In comparison, at the end of August, HSS warned that in the six months to 1 July, reported losses before tax grew to £30m from £8m in the same period last year and sales fell 3.4%. Adjusted underlying earnings before interest, tax, depreciation and amortisation slipped to £17m from £32m. Managment blamed the rising losses on costs associated with “substantial operating model changes.”

However, despite these diverging fortunes, I believe that both companies could be great turnaround plays. 

Undervalued growth

The opportunity with Speedy is clear. The company has managed to slash costs, reduce debt and revenues are rising. City analysts had been expecting the company to report earnings per share of 29% for the full-year, although it now looks as if this forecast is out of date. Still, based on these old figures the shares are trading at a forward P/E of 16.1 and PEG ratio of 0.6 signalling growth at a reasonable price. 

It’s a little harder to see the value at HSS. Analysts believe that the company will report losses for the next two years as it struggles to turn the business around. Adding to the company’s woes is the fact that it has £230m of net debt, which it is due to refinance next year. 

If management can successfully renegotiate this debt with the company’s banks, investors’ confidence might return. With the shares trading at a price-to-book ratio of around 0.5, it certainly looks as if HSS is an attractive value investment.  

But what are the chances of the company successfully renegotiating a debt refinance? Well, with HSS in the midst of a dramatic overhaul, banks are unlikely to pull the plug straight away. That said, any refinancing might come with more stringent demands from lenders, such as higher interest rates and lending constraints. 

So, I believe that the company will see its borrowing facilities renewed, and this, coupled with the outcome of the strategic revenue, due in November, should bolster confidence in the firm’s outlook, leading to a re-rating of the shares.  

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Rupert Hargreaves does not own shares in any company 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.

Unfortunately, today’s interim results have simply poured more petrol on the fire. Over the 26-week period to start of July, revenue at the small-cap fell 3.4% to £160.5m. As a result of “substantial changes” to its operating model, the company booked an adjusted pre-tax loss of £14.2m.

While reflecting that new sales initiatives and cost savings had allowed HSS to return to profitability in June and should lead to a stronger performance in H2, new CEO Steve Ashmore stated that the rate of recovery had been “materially slower than originally expected“. An update on a detailed strategic review is expected in November but it’s fair to assume that a reversal of HSS Hire’s fortunes is going to take a lot longer than first thought.  

Falling 25% in early trading, shares have recovered somewhat. So, is this a knife worth catching? Not in my view.

Aside from today’s awful set of figures, HSS’s extraordinarily high debt burden and inability to consistently turn revenue into solid profits make it a stock for only the most risk-tolerant, patient investors. Free cashflow is unpredictable at best and there’s no dividend to speak of. While a turnaround isn’t beyond the realms of possibility and some kind of bounce may be experienced as traders speculate that today’s reaction has been overdone, I simply can’t see a recovery being anything but long and painful.

Time to take profits?

Also releasing interim numbers this morning was budget gym operator The Gym Group (LSE: GYM). While its results are far better than those presented by HSS, Gym is another stock I’d sell today if for completely different reasons.

In the six months to the end of June, revenue rose just under 19% to £43m with adjusted pre-tax profits coming in almost 42% higher at £6.5m. Membership numbers climbed almost 20% to 508,000 with the company opening six new sites over H1 and two after the reporting period ended (bringing its total estate to 97 gyms). It now expects to hit the top end of its guidance range for new openings (15-20) over 2017.

Elsewhere, strong cash generation allowed management to reduce the amount of debt by £600,000 to £4.6m. The interim dividend was also raised a healthy 20%, even if the overall yield remains negligible.

Despite all this, I still have concerns over how much investors are expected to pay for Gym’s shares. Before today, the stock was already trading on an expensive forecast price-to-earnings (P/E) ratio of 27. While it’s not surprising that the market liked these figures (Gym’s share price rose 5.5% in early trading), I just don’t see enough upside ahead to warrant this heady valuation. 

With operators competing for the same members in an already saturated market, a lot rests on effective marketing — the costs of which aren’t insignificant. What’s more, memberships are surely among the first things to be sacrificed in the event of an economic downturn — assuming, of course, that people still remember that they have them. With Brexit on the horizon and the stock seemingly stuck in the 175p-210p trading range, I’d be inclined to take any profits sooner rather than later. 

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However, even with this situation, there are some stocks which could soar in the long run. Here are two companies which seem to offer growth at a reasonable price at the present time.

Improving prospects

Reporting on Tuesday was tool and equipment rental company HSS Hire (LSE: HSS). It announced that underlying revenue in the second quarter of the year was marginally ahead of the prior year. It has seen an improving rental revenue trend due in part to it introducing a programme of sales initiatives. They have generally gained traction with target customers, and have been supported by the strength shown by the company’s Services business.

The cost reduction activities announced in May have progressed. The majority of them have now been implemented, with savings of £10m having been made. In tandem, the company’s new operating model has improved efficiencies, meaning less capital is required. This should help to free-up cash flow and lead to a leaner business model.

Looking ahead, HSS Hire is forecast to report a fall in earnings in the current year of 14%. While disappointing, it is due to follow this with growth of 85% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which suggests that it may offer upside potential. With a strategy that is gaining traction and improving its business model, its long-term prospects appear to be bright.

Growth potential

Operating within the same sector as HSS Hire is Speedy Hire (LSE: SDY). It is forecast to report earnings growth of 28% in the current year, followed by further growth of 23% next year. This means it has a PEG ratio of only 0.7, which suggests its shares are relatively cheap at the present time.

Having such a wide margin of safety appears to be a requirement for new investors in the company. After all, its track record of growth has been rather volatile. In the last five years its profitability has swung significantly, which means there may be a higher chance of downgrades to its earnings outlook. Therefore, a wide margin of safety provided by a low valuation could allow for substantial capital growth in the long run – even if the company’s performance fails to meet expectations.

As well as its growth appeal, Speedy Hire also offers a fast-growing dividend. Payouts are expected to rise by 44% over the next two years, while still being covered 2.7 times by profit. As such, even with a relatively low yield of 2.5%, the stock could have income appeal.

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Despite these losses the companies are making progress, although it looks as if the market does not believe in their story.

Today Speedy Hire announced an impressive set of results for the fiscal year ending 31 March, but even on this news the shares have barely budged, rising less than 5% in early deals. For the period, revenue grew 12.2% year-on-year and adjusted profit before tax leapt 224% from £5m to £16.2m. Adjusted earnings per share rose 209% to 2.4p. Surging profits helped the company reduce leverage, and net debt fell 30% during the period from £103m to £71m.

After reporting a loss of £53m for the fiscal year ending 31 March 2016, the heat was on Speedy’s management to produce better results, and it certainly looks as if they have achieved this aim. By refocusing on core customers, selling off non-core assets and using free cash flow to pay down debt, management has been able to return the group to profit and City analysts are extremely optimistic about Speedy’s outlook as the recovery continues to gain traction.

For the next fiscal year, analysts have pencilled-in earnings per share growth of 36% as pre-tax profit is set to hit £19.4m. For the year after, analysts are projecting earnings per share growth of 26% to 3.7p as pre-tax profit rises to £24.5m.

Based on these forecasts the shares are trading at a forward P/E of 18.8, falling to 14.8 for the financial year ending 31 March 2019. This valuation may seem expensive, but when you consider the fact that Speedy’s earnings per share are growing at over 20% per annum, the shares certainly deserve to command a premium valuation.

Turnaround starting

Analysts are also optimistic about the outlook for HSS Hire. Even though shares in the company have lost nearly 50% of their value over the past 12 months, analysts believe the group’s problems will come to an end this year, and after four years of losses, analysts are expecting HSS to report a pre-tax profit of £7.2m for 2017.

Profitability is expected to increase further in 2018 with pre-tax profits of £11.9m projected. Earnings per share are projected to hit 5.6p by 2018, up 93% from 2016’s reported figure of 2.9p. Based on these estimates shares in HSS are trading at a 2018 P/E of 10.1, which looks exceptionally cheap compared to the company’s projected growth over the next two years. The shares currently support a dividend yield of 0.5%.

The biggest issue holding back HSS’s shares seems to be market sentiment. After years of losses, it looks as if the market believes the company won’t pull itself out of the hole and meet City growth targets this year. While this view is understandable, over the past 12 months HSS has conducted an aggressive restructuring, which has been supported by investors, and there is reason to believe that the group’s outlook is steadily improving.

The post Is it time to buy these sinking growth stocks? appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any 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.