Why I’m steering well clear of these growth stocks

Jolly Roger pirate flag

For those seeking exceptional growth stocks, industrial value and pump manufacturer Weir Group (LSE: WEIR) may — at first glance at least — appear to be just the ticket.

For 2017, the City expects the business to report earnings expansion of 44%. And an extra 28% rise is forecast for next year.

But scratch a little deeper and Weir becomes much less appealing. At least in my opinion.

A false dawn?

Of particular concern to me is the still-fragile state of commodities markets, even if shale producers returning to work in the US has helped lift revenues at Weir more recently. The firm noted in April that orders from oil and gas customers had leapt 50% in the year to April 26 from the same 2016 period.

While North American sales have sparked higher, progress here remains hamstrung by falling demand in the Middle East. Moreover, Weir’s declaration that “pricing levels remain depressed, with only slight improvements achieved in certain minor product lines,” adds extra concern.

And even though orders at Weir’s Minerals division have also grown more recently (these advanced 10% in the period to end-June), I believe hopes of a sustained turnaround remain built on extremely shaky foundations. Why? Oversupply in the metals and energy markets is generally worsening, potentially putting further pressure on capex budgets should earnings keep on fluctuating.

I for one would not be tempted to invest in Weir right now, particularly as the business sports a forward P/E multiple of 19.8 times. This is far too high given the prospect of biting earnings downgrades in the months ahead, and thus the potential for a crushing share price retracement.

Fragile fightback?

My pessimistic take on many bulk commodity markets also makes me concerned over the long-term growth potential of Ferrexpo (LSE: FXPO).

Helped by the resurgence of iron ore prices over the past year, the Swiss business is expected to record a 62% earnings rebound in 2017. Still, the strong likelihood of ore values continuing their recent reverse is reflected by City brokers forecasting a 37% bottom-line decline next year.

Supply strains

Although appetite for iron ore has recovered from a mild dip in recent months, fears of crushing oversupply persist as mining organisations the world over bring online their next generation of mega projects and expand their existing mines. Indeed, the boffins over at Citi expect 100m tonnes of unwanted material in 2017 thanks to these steady production increases.

Accordingly, industry analysts continue to cut their price estimates for the steelmaking ingredient in the current year and beyond. Citi for one has hacked down its prior estimates in recent days, predicting that the commodity would fall through the $50 per tonne floor before the year is up.

Sure, a prospective P/E ratio of 4.9 times certainly looks attractive on paper. But I reckon the strong possibility of painful iron price declines still makes Ferrexpo a risk too far at the current time.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Weir. 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.

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