While stock markets are generally efficient, it is always possible to find companies which may offer some surprises. Often, this can be because their forecast growth rate has not yet been priced-in by the market. With the FTSE 100 trading near to an all-time high, this may seem unlikely. However, here are two companies which seem to offer wide margins of safety and significant upside potential.
Discounted valuation
Reporting on Tuesday was workspace provider IWG (LSE: IWG). Its performance in the first quarter of the year was in line with management expectations. It increased revenue by 9.1% at constant exchange rates, although this represented a decline of 1.5% at constant exchange rates. However, it expects an improving trend in sales activity to continue through the year, which means its financial performance should do likewise as the current year progresses.
IWG sees an opportunity to increase the number of new locations this year. Improving trading conditions in the US and major European markets last year have been followed by an improved outlook in the UK and in Asia Pacific. Therefore, its future appears to be positive despite uncertainties in the wider macroeconomic outlook.
Looking ahead, IWG is forecast to post a rise in its bottom line of 21% this year, followed by further growth of 15% next year. Although it has an upbeat outlook, its shares trade on a price-to-earnings growth (PEG) ratio of just one, which indicates that there is a wide margin of safety on offer. This could be due to the uncertain outlook for the global economy. While volatility may be high due to Brexit and wider global challenges, IWG’s low valuation means it could deliver high returns over the medium term.
Rising momentum
The share price performance of legal services business Gateley Holdings (LSE: GTLY) has been exceptional in recent months. It has risen by 23% since the start of the year, and by 61% in the last year. Despite this, it trades on a PEG ratio of only 1.7 owing to its forecast growth rate of 9% in the current year. This would follow a similar rate of growth in each of the last two years, which indicates that the company offers a relatively robust and sustainable growth profile.
In addition to capital growth potential, Gateley Holdings is also an attractive income stock. It currently yields 4.3% from a dividend which represents 71% of earnings. This indicates that dividends may increase at a faster pace than the company’s bottom line over the medium term, which suggests a double-digit dividend growth rate may be on the cards.
With inflation set to rise and the stock market being relatively high at the present time, Gateley Holdings has obvious potential for growth and income investors. Its shares may have risen in price in recent months, but that upward trend may be set to continue in future months.
