2 dirt-cheap growth stars that could make you rich

These two stocks seem to be undervalued given their growth potential.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While the valuations of many stocks have risen to all-time highs in recent months, they may not necessarily be overvalued. Certainly, ratings may indicate there is little upside potential on offer. However, when their growth potential is factored-in, such stocks could offer capital growth prospects. As such, they could be worth buying right now. Here are two shares which seem to fit into that category.

Impressive growth

Reporting on Thursday was infrastructure and support services company Stobart (LSE: STOB). It announced to the market that it is on track to deliver its targets of 2.5m passengers at London Southend airport and 2m tonnes of biomass supply annually, by the end of the 2018 calendar year. Further targets have been set to 2022, with the company well-positioned to continue to deliver improving operational performance.

Looking ahead, Stobart faces a somewhat uncertain future. Its CEO, Andrew Tinkler, is stepping down but will remain as an Executive Director. As with any company, this inevitably brings a degree of risk and uncertainty, but since the business seems to have a solid strategy this may not cause significant disruption.

With the company trading on a price-to-earnings (P/E) ratio of 37, it appears to be overvalued at the present time. However, since it is expected to report a rise in earnings of 171% in the next financial year, its price-to-earnings growth (PEG) ratio of 0.2 suggests it could offer upside potential. While the company has ambitious growth targets and is undergoing a period of major change, it seems to have a sufficiently wide margin of safety to merit investment for the long term.

Solid outlook

Also offering capital growth potential is international consultancy company, RPS Group (LSE: RPS). It is forecast to record a rise in its bottom line of 9% in the next financial year. This is ahead of the growth rate of the wider index, and means it has a PEG ratio of 1.5. This could be relatively low considering the company’s track record of growth, as well as its long-term strategy which seems to be progressing well according to its most recent update.

As with Stobart, RPS is about to change its CEO. Its valuation indicates there is a margin of safety on offer, while its income potential means it could become more popular among investors. That’s especially the case since inflation is forecast to rise from its already high level of 2.9%.

RPS currently yields 3.9% from a dividend which is covered 1.7 times by profit. This means it could raise shareholder payouts at a faster pace than profit growth without harming its scope to reinvest capital for future growth. A rising dividend also seems affordable even with the company’s acquisition programme factored-in. According to its most recent update it is seeking to engage in M&A activity, which could act as a positive catalyst on its financial performance.

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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »