Three cheap growth stocks

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Neil Wilkson, Royal LondonEuropean Growth Fund.

The European equity market has enjoyed a strong start to 2012 for a number of reasons. Firstly, progress in the sovereign-debt crisis has ensured that Greece can at least meet its short-term funding requirements. Other peripheral bond yields have fallen as the risk of contagion has declined.

Secondly, another round of Long-Term Refinancing Operation (LTFO) funding has reduced liquidity risk in the banking sector and bought time for an orderly unwinding of bank balance sheets.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Finally, we have seen a number of improving leading macroeconomic indicators as the year has progressed. Despite this, the European market remains cheap relative to other developed markets, offering opportunities in exciting growth companies at compelling valuations. Here are three of them.

Subsea 7 (Oslo: SUBC) is an offshore subsea construction, maintenance and repair company that puts in the plumbing to carry oil and gas from the seabed to the surface. Subsea is the global leader in this market, which is dominated by a few players and has high technical barriers to entry for new competitors.

As the search for new oil moves into deeper and harsher environments, only the largest players have enough scale and knowledge to deal with the increasingly complex engineering. Subsea has seen strong tendering activity in recent quarters, which should lead to significant volume growth in 2013 and 2014, along with stronger pricing, given the inherent capacity constraints in the industry.

In addition, earnings growth will be boosted further thanks to large cost savings from its recent merger with Acergy, which will lead to lower tendering costs, better fleet management and reduced administrative costs.

In recent years Nokia (NYSE: NOK) has fallen out of favour, particularly after it lost market share to rivals such as Apple. This is because it failed to deliver a competitive offering for the fast-growing smartphone market. However, Nokia has recently introduced a brand new range of handsets, called Lumia, which run on a Microsoft operating system.

These phones have features such as live tiles on the start screen, which offer instant updates for social media services such as Twitter or Facebook. The number of apps being developed to run on the Lumia range has grown significantly in recent months, making it more attractive to users.

Nokia has also indicated that it is working on the development of a tablet that will run on Windows 8 and is likely to compete with the iPad. Given that expectations for Nokia are low, a successful turnaround is likely to be well rewarded by the market.

My final choice is Grifols (Madrid: GRF), a leading player in the global plasma derivative industry. The company collects blood donations, which are then processed and purified, with the resulting products used in a variety of medical treatments, such as transfusions.

This industry is highly regulated, has high barriers to entry and enjoys strong structural growth of 6%-8% a year. Future growth may accelerate as Grifols is working on a number of new applications for its products in the treatment of Alzheimer's disease, for example.

Following the recent merger with a competitor called Talecris, Grifols is expected to see big cost savings from better use of its manufacturing facilities and back office rationalisation. In addition, it has restructured its balance sheet to reduce financing costs. This will help to drive decent earnings growth in the coming years.