Why I’d sell this turnaround stock to buy this hot growth stock

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Shareholders of exhibitions firm ITE Group (LSE: ITE) have a right to be frustrated with the company’s progress. Over the past year shares in the business have gone nowhere and over the previous five years, they have produced a return of minus 24% excluding dividends.

Still, according to a trading update published by the company today, ITE is back on the part to growth. For the three months to 30 June, the company produced revenue of £58m, up from £46m in the year-ago period, and like-for-like revenue growth of 9%. A recovery in the group’s key Russian market was responsible for most of this increase. For the nine months to 30 June revenue is 4% ahead on a like-for-like basis. A healthy cash flow from operations has also helped the company reduce net debt to £54m, down from £64m in the year-ago period. For the full year, management is expecting revenue growth of 4%.

Expensive recovery 

This steady growth shows that the company is recovering from some of its problems, but despite the improvement, the shares still do not look attractive to me. Specifically, at the time of writing shares in ITE look overvalued, especially when compared to the firm’s shrinking earnings. Even though revenue is rising steadily, City analysts expect ITE’s earnings per share to contract by 24% for the fiscal year ending 30 September, following declines of 30% for the last fiscal year and 24% for the year ending 30 September 2015. 

And after three consecutive years of earnings contraction, shares in the group trade at a forward P/E of 19.3, a high multiple that seems unwarranted considering the company’s current position. The shares offer a dividend yield of 2.7% although this is hardly enough to compensate investors.

A better buy? 

A better buy might be Tarsus Group (LSE: TRS). Over the past year its shares have produced a return of 11%, and over the previous five years, the shares are up by almost 80% excluding dividends. Media group Tarsus has clearly gone from strength to strength over the period, unlike its peer. Earnings per share have expanded rapidly from 12.2p for 2012 to 27.1p for 2017. Meanwhile, revenue has more than doubled from £51.5m to £125m, and pre-tax profit has surged from £8.4m to £40.7m. Despite this rapid growth, the shares still trade at a relatively attractive valuation. 

Indeed, even though City analysts expect the company to report earnings per share growth of 78% for this year, the shares only trade at a forward P/E of 10.3. Why? The firm’s earnings are lumpy and are expected to decline by 32% for 2018. But even considering this decline, the shares still look more attractive than those of its peer above as they trade as at a 2018 P/E of 15.5. Tarsus also beats its peer on yield with a dividend yield of 3.4% covered nearly three times by earnings per share.

Overall, growth stock Tarsus looks to me to be a better buy than turnaround ITE.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ITE Group and Tarsus Group. 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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