Three cheap growth stocks to buy now

When buying stocks, it is important not to overpay for a company’s growth potential, says professional investor Neil Hermon. So he looks for smaller companies that have a sound business model, strong management, a high return on capital and growing market share. Here, he tips three such stocks to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Neil Hermon, director, Pan-European Smaller Companies, The Henderson Smaller Companies Investment Trust plc.

As an investor, it is important not to overpay for a company's growth potential. So we buy growth at the right, or ata reasonable, price. Fundamentally, that means we are bottom-up stock investors looking to invest in good-quality companies at the right valuation level. We also want our investments to have certain key characteristics. These include a sound business model showing such traits as good market position, high return on capital and growing market share. We also look for strong management. This is critical for smaller companies, where success can be highly dependent on key individuals. We like sound financials, particularly a strong balance sheet and good cash flow and, finally, positive earnings momentum.

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