Stock market

2 dirt cheap growth stocks with heaps of potential!

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I know investors who have lost a lot of money on growth stocks. These are stocks that we expect to grow earnings at a faster rate than the rest of the market and, thus, they command a premium valuation.

But if they don’t deliver the expected growth, these stocks crash. As such, they carry more risk than mature investments.

So today, I’m talking about two attractively priced growth stocks. Personally, I don’t think it’s that easy to find competitively priced growth stocks in the current market. One reason for this is the buzz around artificial intelligence (AI) – it has attracted as much money to stocks as anything with AI.

Growth stocks from China

Chinese companies, even those listed in the US, trade at a discount with their international peers. Geopolitics is one reason, as investors worry about whether these Chinese companies could be punished by the US-China trade wars. However, the recently passed ‘Protecting Americans from Foreign Adversary Controlled Applications Act’ is an effective ban or forced sale of TikTok from its parent company ByteDance.

Similarly, investors are wary of Chinese accounting standards (CAS). These originated in the socialist era, focus on state control rather than the needs of investors, and may be less transparent than international investors are accustomed to. At times, the data has been outright manipulated.

Lee Auto (NASDAQ: LI ) and Gigacloud ( NASDAQ:GCT ) are two Chinese growth stocks that I like, and they trade at huge premiums to their US peers. The discount reflects the above reasons but, in my opinion, they are too cheap.

Meet Lee and GigaCloud.

No company operates in a highly regulated space like tech and, as far as I know, does not receive state funding. If the U.S. pursues its trade program against Chinese companies, I wouldn’t expect Le Auto or GigaCloud to be targeted.

For context, Li Auto produces new energy vehicles (NEVs), and is the first of China’s NEV manufacturers to turn a profit. It achieved profitability by focusing on extended-range electric vehicles (EREVs — mainly hybrids), and is now bringing out a range of battery electric vehicles (BEVs), which have impressive range and charging times.

GigaCloud does not operate in the cloud space. It connects furniture manufacturers in China with end markets in North America and Europe. Concerns that its operations were overstated were recently eased after an investment researcher interviewed the CEO.

Development on discount

Li and GigaCloud give their American colleagues access to fast-growing companies at a discount.

Lee Auto’s stock is currently trading at 14.6 times earnings. For context, this corresponds to the average price-to-earnings ratio. FTSE 100 — which isn’t really much in the way of growth stocks.

Given the company’s growth trajectory, Lee is unusually cheap. It’s understandable to worry about China’s EV sales slowdown, but I hope it’s just a blip. Revenue is expected to grow by 19.3 percent annually over the next three to five years.

Meanwhile, GigaCloud trades at 11.3 times forward earnings, with earnings expected to grow by around 20% annually over the medium term. The GigaCloud may face difficulties due to the ocean barrier but, for now, the Panama drought and the Bab al-Mandab crises have not had much of an impact.

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