In the long run though, FTSE 100 shares such as HSBC (LSE: HSBA) could offer strong total return potential. Valuations appear to be low, while their growth prospects could be brighter than many investors are anticipating. As such, now could be the right time to buy HSBC alongside a relatively cheap share which released a disappointing investor update on Friday.

Difficult period

That company in question is technical plastics products supplier Carclo (LSE: CAR). Its share price came under pressure following a profit warning, with trading in the first half of the year falling below expectations as a result of its underperforming Technical Plastics division. Three new medical programmes were delayed by customers during the period. However, all three entered production towards the end of the first half. Together, with planned new tooling programmes, this supports an expected stronger second half performance.

The implementation of an operational improvement programme has the potential to deliver efficiency opportunities, cost savings, and a number of price increases. Meanwhile, the company’s LED and Aerospace divisions have both performed well. As a result,  alongside an expected improvement in its Technical Plastics division, the company has maintained guidance for the full year.

With Carclo now trading on a price-to-earnings (P/E) ratio of 7 following the update, it could offer a wide margin of safety. As such, now could be a logical time to buy it.

Improving outlook

The HSBC share price also seems to offer good value for money. The company has a P/E ratio of around 13, which indicates it could have a margin of safety. The bank is continuing to invest heavily in its operations in Asia, where demand for banking-related products and services is due to increase over the medium term. With a lack of significant exposure to the UK economy, it may be better insulated from Brexit risks than some of its rivals.

HSBC, though, is a global bank. And with the prospects for the world economy uncertain, its shares could fall in the near term. Additional tariffs cannot be ruled out, while an overheating US economy could lead to uncertainty for the medium-term GDP growth rate of the world economy.

However, with the company having what seems to be a solid position in key growth markets, as well as a dividend yield of 6.1% which is covered 1.5 times by profit, its investment outlook appears to be encouraging. It could outperform the FTSE 100 and provide significantly higher total returns than a cash ISA.

According to the update, thanks to “an unexpected delay in the awarding of two large tooling and automation contracts,” as well as the lack of an increase in order volumes from a “a large and long standing non-medical customer,” management now says profit for the full-year should be “significantly below expectations.“

Not only has the reduced order volume had an impact on current year trading, but management also expects there to be a knock-on effect for the 2018/19 financial year. Specifically, the update says as “a consequence of some of these delayed projects and lower customer orders, the Board has now reduced its profit expectations for the 2018/19 financial year” although it goes on to say that the “revised expectations will still represent healthy year-on-year growth.“

Serial disappointments 

Unfortunately, this isn’t the first time Carclo has disappointed investors. Between mid-2012 and mid-2014, shares in the group declined from 470p to 90p as the firm consistently missed growth expectations. After several years of steady performance, it had begun to look as if the company was getting back on track but it now seems as if it is plagued by the same problems. 

This is why I would avoid catching falling knife Carclo today. Even though the business has stabilised over the past few years, as today’s press release notes, there’s an “ongoing reliance upon winning new tooling and automation contracts” to generate sustainable sales growth, which will continue to weigh on growth for the next few years. However, from 2019 onwards, Carclo’s Led Technologies business is expected to begin to yield results, and this should help reduce dependence on the Technical Plastics arm, which is responsible for today’s warning. 

Placing a value on the shares 

Now that management expects the company to miss expectations for the full year, it’s challenging to try and put a value on the shares. City analysts had been expecting earnings of 12.6p per share, rising to 15.2p for the year ending 31 March 2019. Based on these estimates, the shares are trading at a forward P/E of 9.9. Now however, it’s impossible to place a value on the shares until management can issue further guidance. 

So all in all, I’d avoid Carclo after today’s update from the company. Until management offers us more clarity on the firm’s earnings, it’s going to be difficult to work out just what the shares are worth. Also, profit warnings tend to come in threes, so there could be further bad news on the horizon. Considering Carclo’s history, I wouldn’t be surprised if this turns out to be the case. There are other more attractive looking opportunities out there, one of which is profiled below. 

Today’s results give me confidence that this FTSE SmallCap firm, which has a market cap of £106m, is a growth stock I’d be happy to buy and hold until 2020 or beyond. And I feel the same about a £205m-cap stock from the same index, which I’ll come on to shortly.

Down to business

Carclo’s largest division, Technical Plastics (about 60% of group revenues), supplies fine-tolerance, injection-moulded plastic components, mainly for medical products. The division’s first-half operating profit fell 6%. Management said this was due to some key new programmes being delayed into the second half and some operational issues that have now been largely resolved.

The lower profit from Technical Plastics was offset by a 16% increase at its other principal division, LED Technologies. This business, which designs and supplies specialised injection-moulded lighting systems to the luxury and supercar industry, accounts for 35% of group revenue.

The company’s balance sheet remains reasonable after an anticipated rise in net debt to £29.6m from £26m. And there was an encouraging fall in the pension deficit from a previously elevated level.

Nice growth stock on cheap valuation

All three of Carclo’s divisions (the third is a small business in aerospace) are set to have a stronger second half. Forecast earnings per share (EPS) of 12.75p for the full-year to 31 March put the company on a price-to-earnings (P/E) ratio of 11.4. This falls to just 9.5 for fiscal 2019 on the back of a forecast EPS increase to 15.3p, as that substantial medium-term profit growth the company referred to kicks in.

The company has been investing in its manufacturing assets, increasing capacity and efficiency, which should contribute to top-line growth (higher volumes) and bottom-line growth (higher profit margins). Operating in attractive markets and well diversified geographically, with 70% of revenues coming from outside the UK, I see Carclo as a nice growth stock on a cheap valuation.

2020 vision

The other growth stock I’d be happy to buy and hold until 2020 or beyond is the UK’s largest structural steel business, Severfield (LSE: SFR). The company, whose current projects include the new stadium for Tottenham Hotspur FC, has a UK order book of £221m and also an Indian joint venture with an order book of £64m.

The group delivered profit before tax of £13.2m for its financial year ended 31 March 2016 and its target is to double this by 2020. I calculate this would see last year’s EPS of 5.53p rise to over 7p. At a current share price of 67p, the trailing P/E is 12.1. I think it’s eminently reasonable for the market to maintain that multiple, which would mean an average 9% annual rise in the shares through to 2020. On top of that, I’m expecting an average 4% annual dividend yield on cost for investors at today’s price, giving a very decent average 13% total return a year.

Finally, even a small beat on earnings and dividends and a modest re-rating of the shares could bump the return up into the mid-to-high teens. As such, this is another growth stock I’d be happy to buy today.

The company is fairly diversified with three main divisions: technical moulds for the medical devices industry that brought in £88m in the year to March, making exterior lights for supercars that accounted for £43m in sales, and an aircraft components division that grossed £7m.

Each of these end markets has performed very well in recent years and increased volumes have improved operational gearing, leading to the firm’s operating margins increasing annually from 5.39% in 2013 to 8.3% in fiscal 2017.

However, it’s not all roses and butterflies for Carclo as the UK’s decision to exit the EU has thrown up significant roadblocks for the firm. Brexit wreaked havoc on the bond markets and led to a sharp fall in the bond yields it used to discount its pension obligations. Because of this, its net pension liabilities rose from £18.9m to £27m year-on-year in 2017, which wiped out the firm’s excess cash position, increased leverage and led it to cancel its dividend for the year.

But even with that in mind, Carclo was never a huge income stock and analysts have pencilled in earnings increases of 5% and 20% for the next two years respectively as global GDP growth remains high, stoking demand for each of its end markets. Economic tailwinds and a history of making smart bolt-on acquisitions makes hitting these forecasts entirely reasonable. And with a very attractive valuation, I’ll be digging into Carclo some more in November.

Scalding hot growth on tap? 

Another cheap growth stock on my radar is relatively new IPO Strix Group (LSE: KETL). The company designs and manufactures safety devices for kettles and other water heating devices. The group is the leader for such devices in regulated markets such as the US, UK and Europe with market share of around 60% at the time of its IPO.

This strong position and its patent-protected devices give it significant pricing power that management has used to attain operating margins of 27% in the year to December 2016. In the same year, sales grew 10% as it introduced new products and the global kettle market grew

Looking forward, the group sees good potential to increase its share of non-regulated markets, where it currently supplies roughly 18% of all kettles and in China, where its market share is around 50%. Strix is accomplishing this by developing new devices that offer both the cost savings its OEM customers require and introducing higher safety levels than fellow competitors can offer.

The group can accomplish this as it owns and operates its own manufacturing facilities. One on the Isle of Man focuses on more precision parts, while its Chinese operations focus on volume. With solid growth and income potential and a reasonable valuation of 12.5 times forward earnings, I’ll be keeping an eye on Strix Group in the coming months.

Uniquely positioned

The group based in Shoreham-by-Sea, West Sussex, works across a range of market sectors including passenger cars, commercial vehicles, rail, defence, motorsport, energy, and environment, with a client list that includes transport operators, manufacturers, energy companies, financial institutions, and government agencies.

Ricardo’s in-house engineering capabilities enable it to design and deliver high-quality prototypes and low-volume manufacturing of complex products and assemblies, including engines, transmissions, electric motors and generators, battery packs, and fuel cell systems.

Record order book

The company is uniquely positioned to handle the toughest strategic and operational challenges, with assignments that have included strategy development, cost reduction, safety management, regulatory compliance and environmental impact assessments.

Preliminary results for the full year ended 30 June revealed a 6% rise in total group revenues to £352.1m, compared to £332.4m the previous year, with underlying pre-tax profits in line with expectations at £38.3m. The financial year ended with another record closing order book at £248m, a 7% increase on the previous year.

Aston Martin

It was a particularly good year for the group’s Rail and Environmental consultancies, as well as its Performance Products business, which delivered its 10,000th engine to McLaren, and was selected to design and produce an advanced hypercar transmission for Aston Martin.

Ricardo’s shares have pulled back sharply since last year’s all-time highs, and now offer much better value trading at just 13 times earnings for the current fiscal year to June 2018.

Luxury car market

Carclo (LSE: CAR) is another specialist small-cap firm that’s no stranger to the luxury car market. I last looked at the technical plastic products supplier back in April when I rated the shares a buy. But after a mixed trading update, am I still bullish on the West Yorkshire business?

In its most recent update, Carclo revealed that overall trading for the current financial year to March 2018 remains in line with expectations, with strong trading at its LED Technologies division which provides lighting for top of the range luxury cars such as Aston Martin, Lamborghini and McLaren.

Technology-led

But the Technical Plastics division had a challenging start to the financial year with new programmes being delayed and some operational challenges, which have now been largely resolved. Performance is now much improved and should be considerably better in the second half.

Carclo’s share price has pulled back sharply since peaking in June, and I believe this presents investors with another opportunity to stake a claim in this exciting technology-led business. Trading on a forward P/E rating of less than 11, I think the shares are simply too cheap for bargain hunters to ignore.

And with the online travel agent steadily grabbing share from its traditional rivals, thanks in no small part to the appeal of its bespoke packages, I reckon the stage is set for the sun-and-sand specialist to keep on rising.

On The Beach saw total revenues leap 7.3% to £38.1m in the six months to March, a result that propelled pre-tax profit 33.8% higher, to £9.9m. And promisingly, chief executive Simon Cooper announced that the strengthening of bookings witnessed towards the end of the period had continued into the second fiscal half.

The business is successfully riding the e-commerce phenomenon with holidaymakers increasingly buying their packages online instead of popping into a high street travel agent.

And the acquisition of fellow internet-only operator Sunshine.co.uk earlier this month for £12m significantly bolsters On The Beach’s revenues opportunities. The newly-acquired unit will add 200,000 customers to the 1.2m sun worshippers currently travelling with the company.

Lie back and relax

City brokers are in agreement that On The Beach is set to put recent earnings weakness firmly behind it, and current forecasts suggest a 31% earnings bump in the year to September 2017 is on the cards. But the good news does not end here as an additional 25% rise is forecast for next year.

And these projections make On The Beach knockout value for money too. Sure, a forward P/E ratio of 22.6 times may ride above the broadly-considered value yardstick of 15 times. But a PEG reading of 0.7 (well underneath the bargain benchmark of one) suggests the travel titan is actually attractively valued relative to its earnings potential.

In the fast lane

Carclo (LSE: CAR) is another hot growth star trading far too cheaply, in my opinion.

The engineering play has a long track record of generating formidable, double-digit earnings expansion. And the number crunchers see no reason for this rich record to end any time soon — rises of 13% and 21% are pencilled-in for the years to March 2018 and 2019 respectively, following on from a predicted 14% surge for last year.

These predictions leave Carclo dealing on a forward P/E multiple of 11.2 times, as well as a PEG ratio of 0.9 times, figures which fail to truly value the progress the plastics manufacturer is making just in the automotive sector.

The LED division’s Wipac arm — which builds lighting systems for the prestige car market — has “continued to win new lighting programmes,” Carclo announced earlier this month.

And most promisingly, the West Yorkshire business announced it had won a second mid-volume project on a vehicle for the hybrid market, a huge step in its progression into the mid-volume area.

I reckon Carclo could prove a spectacular growth pick in the coming years, particularly as global vehicle build rates continue to soar.

Improving performance

Reporting on Monday was high-performance polymer solutions specialist Victrex (LSE: VCT). It announced a rise in group revenue of 12% for the first six months of its financial year, with volume growth contributing 5% towards sales growth. With no change to the company’s gross margin, this means gross profit was also 12% higher when compared to the same period of the prior year. This allowed the company to raise dividends per share by 4%, which puts it on a dividend yield of around 2.3%.

In terms of the breakdown of its performance, Victrex endured a somewhat mixed period. Its core business enjoyed strong growth and this helped to offset lower year-on-year volumes in Consumer Electronics. Similarly, the performance in the company’s Medical division remains muted, which reflects the maturity of the US Spine market. However, with a strong product pipeline and scope for growth within the differentiated products space, its outlook remains upbeat.

In fact, Victrex is forecast to record a rise in its bottom line of 7% in the current year, followed by further growth of 10% next year. This puts it on a price-to-earnings growth (PEG) ratio of only 1.6, which suggests that it offers growth at a reasonable price. Therefore, now could be the perfect time to buy it.

Low valuation

Also offering the scope for FTSE 100-beating performance is plastic components supplier Carclo (LSE: CAR). It has a strong track record of growth, with its bottom line having risen at a double-digit pace in each of the last three years. In fact, its earnings have grown at an annualised rate of 25% during the period. This has helped to push the company’s share price almost 30% higher during the last three years.

Despite this high rate of growth, Carclo continues to offer excellent value for money. For example, it trades on a price-to-earnings (P/E) ratio of 13, which suggests further share price growth could be ahead. Making this more likely is a high forecast rate of earnings growth over the next two years. Carclo is expected to record a rise in its bottom line of 13% this year, followed by further growth of 21% next year.

This puts its shares on a forward P/E ratio of just 9.6, which suggests they could rise significantly and remain modestly valued. Therefore, they could continue to outperform the wider index, as they have done by 22% in the last three years.

Premium car market

The West Yorkshire-based business is the leading global manufacturer of fine tolerance parts for the Medical, Industrial, Aerospace, and Luxury & Supercar Lighting markets. Approximately three fifths of group revenues are generated from the supply of fine tolerance, injection-moulded plastic components, primarily for medical products. The rest is derived mainly from the design and supply of specialised injection-moulded LED-based lighting systems to the premium car market.

The small-cap firm’s latest update confirmed that its Technical Plastics division had delivered yet another year of growth and operating margin improvement, with margins expected to be close to its 10% target. The LED division’s Wipac business has continued to win new lighting programmes and has been awarded a second mid-volume project on a vehicle for the hybrid market. The win is important for the division as it endorses the company’s strategy to move into the mid-volume sector.

Attractive valuation

Carclo’s performance has been impressive in recent years, with revenues rising year-on-year from £87m in FY 2013, to £119m for FY 2016. According to our friends in the City, this figure is expected to rise by 19% for the financial year just ended to £142m, and by a further 11% to £157m by fiscal 2019. The group has also achieved strong levels of growth in underlying earnings, rising by a massive 94% from just 6.2p per share in FY 2013 to last year’s reported figure of 10.1p per share.

Analysts’ consensus forecasts suggest that earnings should continue to grow at a healthy rate, rising by a further 55% by FY 2019 to 15.65p per share. This leaves the shares trading on a very attractive valuation of just 11 times earnings for the year to March 2018, dropping to just nine times by FY 2019. I currently view Carclo as a buy for growth hunters who don’t mind taking on a higher degree of risk at the small-cap end of the market.

Death and taxes

I’ll admit that as a small-cap firm with a market value of just over £100m, Carclo may not be every investor’s cup of tea. Generally speaking there is always a higher level of perceived risk that goes hand-in-hand with the promise of untold riches if the share price soars.

For more risk-averse investors, the utilities sector has always been a firm favourite, and for good reason. Along with death and taxes, gas and electricity bills are one of modern life’s certainties. Despite increasing competition in the energy market, British Gas owner Centrica (LSE: CNA) remains the UK’s largest energy supplier, and continues to reward shareholders handsomely with a generous slice of its profits each year.

This year the Windsor-based group is expected to increase its full-year dividend payout from 12p to 12.35p per share, leaving investors with a generous yield of 5.9%.

Carclo advised last month that at its LED Technologies arm, its Wipac supercar lighting products keep on making a huge impact with the world’s car manufacturers, with the business noting that the segment “continues to win new lighting programmes within the low volume sector”.

And Carclo added that it “remains focused on securing a further mid volume programme in the new financial year, which will support the anticipated strong growth of this business”.

But the huge potential riches afforded by the fast-growing premium and supercar segments are not the only reasons to get excited about. Carclo’s Technical Products division is also gaining momentum, helped by shrewd bolt-on buys like Precision Tool & Die in October. And the West Yorkshire business is looking to ride this wave by turbocharging its manufacturing capacity in China and India.

The City expects Carclo to keep its record of double-digit earnings rises trucking long into the future, and predict a 13% rise in the year to March 2017 to be followed by increases of 13% and 21% in fiscal 2018 and 2019 correspondingly.

And these projections make the engineer stunning value for money, in my mind. For the current period Carclo deals on a P/E ratio of just 12 times, and the multiple topples to a mere 10.6 times for next year and 8.8 times for 2019.

Furthermore, sub-1 PEG multiples through to the close of 2019 illustrate Carclo’s stunning value relative to its growth prospects.

Gun show

Rapid expansion over at The Gym Group (LSE: GYM) also leaves it in great shape to deliver excellent profits growth in the years ahead.

The get-fit fanatic boasted 89 facilities at the end of last year, up from 74 sites a year earlier and a figure in line with its target of opening 15-20 gyms per annum. And The Gym Group expects to meet the upper end of this goal in the current year.

Not only is the Surrey-based business effectively hitching onto Britain’s growing fitness craze, but The Gym Group’s focus on the value end of the market in particular is delivering strong revenues growth. The top line expanded 22.6% last year, the company announced in January, while membership numbers swelled to 448,000 by December from 376,000 a year earlier.

Like Carclo, the Square Mile also expects The Gym Group to rack up eye-popping earnings growth in the years ahead, the firm anticipated to have bounced into the black in 2016. Indeed, expansion of 43% and 25% is presently predicted for 2017 and 2018 respectively.

While subsequent P/E ratios of 25.7 times and 20.6 times may appear toppy on paper, PEG readings of 0.6 times for this year and 0.8 times for 2018 underline The Gym Group’s exceptional value.

For the period the company reported a 10.7% increase in revenue to £63.3m, up from £57.2m for the first half of 2015. The company’s operating profit before exceptional items grew by 19% to £5.6m compared to £4.7m for 2015 and Carclo’s underlying operating margin increased by 62 basis points to 8.8%. Earnings per share rose by 24.4% to 5.6p. 

However, despite the company’s robust headline results, there are some worrying numbers in today’s trading statement. For example, as anticipated net debt rose to £27.6m at the half year, due partly to the impact of currency movements on the re-translation of the group’s US dollar and Euro denominated. Additionally, IAS 19 retirement benefit liability net of deferred tax increased to £42.6m from £18.9m at the previous year end. 

Still, since the half-year end, the group has raised £7.7m via way of placing 6.6m new shares at 120 per share. £4.7m of the funding has been used to used to repay the short-term debt facility used to fund the initial consideration for the acquisition of Precision Tool & Die with the rest being utilised to repay other debt facilities. As a result, overall group net debt should be significantly reduced at the end of Carclo’s financial year. 

Good news for shareholders 

All in all, today’s half-year update from Carclo is full of good news for shareholders. While the group seemed to be stumbling earlier in the year, in now looks as if the firm is back on track. Management certainly believes this to be the case. 

In today’s update management declared that the group is “trading in line with its expectations for the full year.” City analysts are expecting the company to report a pre-tax profit of £10.7m for the year ending 31 March 2017 and earnings per share of 11.2p. Based on these forecasts the shares are trading at a forward P/E of 11.2p. Full-year earnings per share growth of 11% is pencilled in for this fiscal year followed by 14% for 2018. 

If Carclo hits these targets, then it could be a super cheap growth stock. Based on current estimates the shares are trading at a forward P/E of 8.8 for the year ending 2018. 

Why so low? 

The question is, why is the market placing such a low valuation on Carclo’s shares? It’s difficult to know exactly, but it would appear the market is discounting the pension deficit from the group’s balance sheet. Management cut Carclo’s dividend payout to investors earlier this year to help manage pension payments and this might be a sign of things to come if the deficit continues to balloon — there might be further pain to come for shareholders. 

So, if Carclo’s pension issue worries you, it might be wise to stay away from the company. On the other hand, if you’re not worried about the pension, the shares appear to offer growth at a reasonable price.