Between two growth stocks, one trading at $5 and one at $50, which would you call cheap? On the face of it, the $5 stock might look cheap, but if that is its 52-week high and its actual value is only $3, then the $5 stock is expensive. Cheap is subjective and depends on the value the stock can give you versus the stock price.
Identifying a cheap growth stock
Many a time, the market panics over short-term headwinds and sells stocks that have long-term growth potential. The best example is Bombardier. The business jet maker was reducing its debt, beating expectations, and improving profits. Despite this, the stock fell 40% between the August and October 2023 bear market when the TSX Composite Index fell more than 9%. It was a cheap growth stock. Anyone who purchased it during the dip doubled their money as the market realized the company’s growth potential.
Two ridiculously cheap growth stocks to buy in 2024
While Bombardier has surged to its potential and is trading at appropriate valuations, there are still some cheap growth stocks you can consider buying hand over fist in 2024.
Magna
Magna International (TSX: MG) stock has slipped 46% since the beginning of 2022 and is now trading at 1.1 times its book value. I am using the book value since the company is cyclical. It has cycles of high sales that convert into high earnings per share (EPS) as the factory utilization increases. In a cyclical downturn, factory overheads reduce its EPS. Therefore, consider looking at the trend of how the company’s financials withstand a crisis.
| Magna’s fundamentals | 2020 | 2021 | 2022 | 2023 |
| Sales (US$ Billions) | 32.6 | 36.2 | 37.8 | 42.8 |
| YoY Growth | 11% | 4.4% | 13.1% | |
| EPS (US$) | 2.52 | 5 | 2.03 | 4.23 |
| YoY Growth | 98.4% | -59.4% | 108.4% |
Magna stock did not jump on robust 2023 sales amid a weak automotive business environment. The interest cuts could gradually boost sales and bring back the electric vehicle (EV) boom. Magna has already invested in plant and machinery capacity to cater to the EV trend. The fact that its EPS remained positive during all four years shows its resilience in the downturn.
The company has been accumulating its net income over the years and adding to the balance sheet –shareholders’ equity as retained earnings. The market has priced the stock at its book value, which means there is no premium on the stock. Cyclical demand could drive its EPS, which will be added to the retained earnings and increase the book value per share. The stock price could increase by more than 100% in a cyclical upturn.
Dye & Durham stock
Dye & Durham (TSX: DND) is a legal practice management software provider whose Unity platform is growing organically. Its annual recurring revenue (ARR) increased to 30% in the third quarter ended March 2024 (from 19% a year ago). Its adjusted net income increased 49% year-over-year to $11.8 million. Removing the adjustments, the company made a net loss of $21 million.
While operations have been doing well, failed acquisitions of TM Group and Link inflated other costs – impairment of intangible acquired assets, finance costs to fund the acquisition, and other transaction and acquisition-related costs. The adjusted net income shows the scenario for DND if the two acquisitions did not happen.
The July quarterly earnings will see the last of the acquisition effect as TM Group’s August 2023 divestiture will complete the fiscal year cycle. The second half will see a recovery in DND’s earnings, as finance costs reduce due to interest rate cuts and accelerated debt repayment. The stock is currently trading at 1.9 times its book value. Once the company reports positive net income, its book value will increase and drive its share price.
Now is the time to catch the DND stock before it picks up momentum.
