These FTSE 250 growth stocks look grossly undervalued

Buying these two FTSE 250 (INDEXFTSE:MCX) stocks could lead to high capital gains.

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While a rapidly rising FTSE 250 index has meant that share price valuations have increased, for some companies a higher index level has been a good thing. Specifically, within the wealth management sector, companies are likely to receive a boost from surging share prices. In some cases this is because of higher fees charged on inflated assets under management. In others, it is because of improving investor sentiment, which means greater amounts of people’s wealth are invested in shares.

Improving performance

One beneficiary of rising share prices is likely to be Brewin Dolphin (LSE: BRW). The investment management company reported an upbeat set of half-year results on Wednesday. They show that it was able to increase total funds under management by 6.8%. Its discretionary funds rose by 9.4%, which compares to a 6.1% increase in the FTSE 100 index. As such, it appears as though the company’s sales strategy is working well at the present time.

The company’s adjusted profit before tax of £32.4m was 14.1% higher than in the same period of the prior year. The acquisition of Duncan Lawrie Asset Management could have a positive impact on the company’s profitability in future. Capital is available for further M&A activity to complement organic growth, with Brewin Dolphin enjoying an increasingly dominant position within the UK wealth management space.

Looking ahead to the rest of the year, Brewin Dolphin is expected to record a rise in its earnings of 8%. This is due to be followed with growth of 12% next year, which puts the company’s shares on a price-to-earnings growth (PEG) ratio of just 1.2. This indicates that now could be the perfect time to buy them – especially if share prices continue to move higher.

Low valuation

Also offering growth at a reasonable price within the wealth management industry is Brooks Macdonald (LSE: BRK). As with Brewin Dolphin, it is likely to benefit from higher share prices. While there is potential for the FTSE 350 to experience a pullback if political uncertainty in the US and Europe continues to build, the company’s valuation indicates that it offers a sufficiently wide margin of safety to merit investment. For example, it trades on a PEG ratio of just one, thanks to its double-digit earnings growth outlook over the next two years.

As well as growth potential, Brooks Macdonald also offers upbeat income prospects. It may only yield 1.9% at the present time, but dividends per share are expected to rise by 19% next year. This puts it on a forward dividend yield of 2.2%. Since dividends are due to be covered 2.4 times by profit, there seems to be scope for a further rapid rise in shareholder payouts over the medium term. This mix of improving income prospects and a low valuation mean that it could be a star performer within an enticing sector.

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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