Two top growth stocks trading at bargain valuations

These two stocks could offer index-beating performance in the long run.

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While there are a number of risks facing investors at the present time, buying undervalued stocks could be a sound strategy for the long run. The impact of Brexit may be significant but obtaining a wide margin of safety could be one means of overcoming the potential for a decline in the wider index in the short run. It could also lead to high returns for years ahead. With that in mind, here are two shares which could be worth buying right now.

Improving performance

Reporting on Wednesday was banking group BGEO (LSE: BGEO). The Georgia-focused company reported impressive results for the first quarter of the year that showed its current strategy is working well. For example, profit increased by 24.3% year-on-year, while book value per share was up 15.5% versus the same quarter of the prior year.

Furthermore, its cost-to-income ratio was 36.1% against 37.5% in the final quarter of the previous year, which indicates that it is becoming increasingly efficient. Return on equity moved higher by 3.4 percentage points to 23.5%, while a solid capital and liquidity position helped to strengthen BGEO’s balance sheet. Given the risks faced by the global economy, this could help to improve investor sentiment.

Looking ahead, BGEO is forecast to record a rise in earnings of 27% in the current year, followed by further growth of 15% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of only 0.5, which suggests their upside potential may be high. Certainly, the bank lacks the international diversity of many of its UK-listed peers. But with a low valuation and strong growth prospects, it could perform relatively well in the long run.

Dividend potential

With inflation moving higher, stocks which can grow dividends at a fast pace may become increasingly popular over the medium term. As such, growth investors may be concerned with dividend growth, as well as earnings growth, in future years. One company which appears to offer scope for the latter in particular is banking specialist Close Brothers (LSE: CBG).

The company has increased dividends per share by 7.5% per annum during the last five years and yet its shareholder payouts are covered 2.1 times by profit. This suggests that further inflation-beating growth lies ahead. Even if dividends were to rise at a similar pace in the long run as they have in the recent past, it is unlikely to hurt the financial strength of the business. Its bottom line has risen at an average growth rate of 15% per annum during the same period. As such, its current rate of dividend growth seems to be highly sustainable.

With Close Brothers trading on a price-to-earnings (P/E) ratio of 13, it seems to offer excellent value for money. Therefore, while other stocks may be cheaper right now, it could prove to be a sound investment option based on its risk/reward ratio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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