2 beaten-down growth stocks to buy as inflation rises

A pastel colored growing graph with rising rocket.

Even as inflation hits 40-year highs, the FTSE 100 has maintained a steady growth trajectory since the big pandemic crash in 2020. There have been many mini-crashes along the way, but I think fears of another major crash are overblown. Businesses with strong balance sheets and revenue streams especially will most likely have good runs in the market over the next decade.

I think I should focus on these steady growth stocks right now rather than chase the next big penny stock. And two beaten-down growth stocks from my watchlist look very cheap and could be great long-term prospects for my portfolio.  

Tech growth stock down 41%

Software firm Kainos (LSE: KNOS) is a service provider to private and government organizations. The company specialises in data aggregation and AI-related software services that help businesses streamline and organise data. And after the recent tech crash, its share price is down 41% in 2022.

But Kainos has been posting some impressive financials recently. In the interim report for the period ended September 2021, Kainos recorded organic revenue growth of 32%. The company increased its cash balance by 29% to £80m which prompted an 11% dividend hike to 7.1p per share. 

Its digital services business is growing at a compounded annual growth rate (CAGR) of 29% and its partnership with Workday Practices is growing at a CAGR of 49%. For a subscription-based service, its customer retention rate of 89% is very impressive too. The company is largely debt-free and is investing in promising R&D avenues.

Despite this strong showing, the tech sector does come with a few concerns. Despite the current drop in price, Kainos shares are still trading at a price-to-earnings (P/E) ratio of 32 times, which is high. Another concern is that businesses may cut external services to save costs during periods of inflation. 

But Kainos has a strong business model and looks like one of the top growth stocks on my list. The company has promising partnerships with the UK government and private sector firms. And I would be tempted to make an investment if the share price drops below 900p.

British pandemic superstar 

Plumbing firm Ferguson (LSE:FERG) grew immensely after the pandemic crash. Between April 2020 and December 2021, its stock jumped nearly 200%.

But as markets correct, Ferguson shares have gone down 27% so far in 2022 and are currently trading at 9,700p with a P/E ratio of 13 times. And I think now is the perfect entry point for me to invest in this excellent growth stock.

Recently released second-quarter (Q2) 2022 results look very impressive to me. The firm recorded strong sales growth of 29.1% and grew operating profits by 68.3%. In the three months ended 31 January 2022, the company recorded an operating profit of $555m. This is 74% higher than the corresponding period in 2021. The company also rolled out $417m of a $1bn share buyback program recently.

Fluctuating macroeconomic conditions and increased competition from smaller companies in the US and Canada are big concerns. Also, setbacks from halted development projects could dent future earnings. 

But the company remains one of the top growth stocks on my watchlist. It is available at an attractive price backed by strong recent financial performances, which is why I would consider an investment if prices drop further.

The post 2 beaten-down growth stocks to buy as inflation rises appeared first on The Motley Fool UK.

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More reading

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  • 3 British technology stocks to buy for the digital revolution
  • 2 top UK shares to buy and hold

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos. 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.