2 'undervalued' growth shares I'd buy before it's too late

2 ‘undervalued’ growth shares I’d buy before it’s too late

These two stocks look set to deliver improved financial and share price performance.

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 12 April, 2017 12:22 pm BST

| More on: SPO

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.

While share prices can change for a variety of reasons, improved profitability has historically been one of the most dominant factors. Whether that’s a rise in profit or a return to profit after a period of losses, investors seem to heavily reward companies which are able to deliver a sustained improvement to their bottom lines. Here are two stocks on the cusp of that position which could be worth buying for the long term.

Upbeat performance

Reporting on Wednesday was online advertising specialist RhythmOne (LSE: RTHM). Its trading update for the most recent financial year shows that it has made excellent progress towards its target of returning to profitability. This was aided by a rise in core revenue of 28%, which pushed total revenue 5% higher. This led to a swing in EBITDA (earnings before interest, tax, depreciation and amortisation) of $11.7m, with the company reporting EBITDA of $1.2m.

Clearly, 2017 was a pivotal year for RhythmOne. It saw a continuation of the fundamental transformation which started two years ago that has put the company in a much stronger position. Its investment in core strategic capabilities across mobile, video and programmatic trading has been hugely beneficial. Its acceleration of the drawdown of certain historical non-core and non-programmatic product lines has also delivered improved financial performance.

Looking ahead, the company has an upbeat outlook. It is expected to deliver a black bottom line in the current financial year and then record growth of 91% in the next financial year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.2, which indicates that they offer a wide margin of safety.

With the company’s growth strategy continuing to deliver improved performance, its shares may not remain so cheap for all that long. Therefore, now could be the perfect time to buy them.

Improving outlook

While betting company Sportech (LSE: SPO) is forecast to record a rise in its bottom line of just 3% this year, its outlook for next year is much more positive. It is expected to deliver a rise in its earnings of 17%, which has the potential to create a step change in investor sentiment following a rather mixed period for the business. For example, in the last five years its earnings have fallen in three financial years and were 9% lower in 2016 than they were in 2011.

Possibly because of its volatile track record of earnings growth, Sportech’s shares trade on a relatively low valuation. They have a PEG ratio of only 0.9, which indicates that now could be the perfect time to buy them. Certainly, competition within the gaming and betting sector is becoming increasingly intense and this has led to sector consolidation. However, with a clear catalyst to push its share price higher, Sportech could be a relatively strong performer in the long run.