3 Cheap Growth Stocks for Further Research

Betting on growth can be risky. Therefore careful investors like to pay as little for growth as possible. Additionally, if there is some moat around the company’s products or services, however weak, it mitigates the risk to a great extent and even a die hard value investor may be tempted to take a look.

The following 3 companies all exhibit high growth, excellent Return on Equity, minimal debt and some sort of competitive advantage, at least in the short run. Their shares are also cheap and sport a trailing PE ratio below 5.

  1. Depomed Inc. (DEPO): Depomed is a specialty pharmaceutical company that develops and markets drugs based on its proprietary oral drug delivery technology. It currently has GLUMETZA in the market for treatment of Type II diabetes, recently launched GRALISE for treatment of after shingles pain and has SERADA in Phase III trials for the treatment of post menopausal hot flashes. The company has a market value of $336 million and its stock trades at a trailing P/E ratio of 3.46. Depomed also has $114 million in cash and has insignificant debt. The average current year earning estimates are $1.2/share. With the stock price around 6, this puts the FY 2011 P/E at 5. Next 5 years growth rate is expected to be 30%/yr giving it a PEG ratio of 0.17. Depomed has a good pipeline and a stable revenue source and is not a one trick pony that one often finds in the pharma/biotech sector.
  2. LML Payments (LMLP): LML Payments is a Vancouver, BC based company that provides payment processing solutions to online retailers through its Beanstream Internet Commerce subsidiary as well as to traditional shops. It currently serves around 10,000 businesses and organizations. At $45 million in market value and with $23 million in cash, the company stock sells at just 4.37 trailing P/E. LML Payments has no following on the Wall Street and with a profit margin of 22% and ROE of 28%, it is just a matter of time before the company gets on investor’s radar. YOY quarterly earnings growth came in at 28% in the last reported quarter.
  3. Zix Corporation (ZIXI): Zix provides email encryption services using Software as a Service model to healthcare, financial services, insurance and government sectors in the US. Its secure messaging service allows enterprises to comply with regulations and policies. The stock currently trades at 4.31 trailing PE and 13.85 forward PE with a 5 year expected growth rate of 21%. The company has $17 million in cash and no debt and has a current market value of $177 million.

All three of these stocks are small caps with varying level of analyst coverage. The stock market has not been too kind to smaller companies in recent times, as a result there are plenty of opportunities like this on offer. As smaller companies are also much riskier, given that research and information is hard to come by, further research and analysis of these stocks is advised.

Disclaimer: The author does not own any of the stocks mentioned in this article and has no plans to buy or sell these stocks in the next 72 hours.

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