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2 under-the-radar growth stocks with exciting momentum

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While large-cap stocks get much of the attention from investment analysts, there’s a whole universe of smaller companies out there to consider as well. Valuations appear to be more attractive for many small- and mid-cap stocks, while growth is still strong. With this in mind, I’m taking a look at two under-the-radar stocks with momentum on their side.

Impressive results

Georgia’s largest retail bank TBC Bank Group (LSE: TBCG) today reported results for the second quarter of 2017. Underlying net profit increased by 37% year-on-year, as robust economic conditions spurred strong growth in its loan book.

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It’s encouraging to see the continued improvement in its underlying operating performance after shares in the bank have gained over 40% over the past 12 months. These impressive results are proof of the soundness of its growth strategy and showcase the strong operating leverage of the bank.

Return on equity moved higher by half a percentage point to 20.4%, as its loan portfolio grew by 30.8% on the previous year and 3.7% over the previous quarter to GEL7.39bn. Unfortunately, net interest margins (NIM) fell by 1.1 percentage points from the same period last year to 6.8%, reflecting competitive pressures in the banking sector which has driven loan yields lower. That said, conditions may be starting to stabilise, as NIM in the second quarter actually rose by 0.2 percentage points on a sequential quarterly basis, its first increase in just over a year.

Looking ahead, City analysts reckon the bank’s underlying earnings are set to rise 19% in the current year, followed by further growth of 11% next year. This means its shares trade at just 7.4 times its expected earnings this year, or only 6.4 times its expected earnings in 2018. And with forecasts of around 58.5p per share in dividends this year, TBC Bank seems to offer a potent mix of income and value, with the shares forecast to yield 3.7%.

Merger

Also showing exciting momentum are shares in wealth manager Rathbone Brothers (LSE: RAT). They’ve gained 40% since the start of the year but they may yet have further to go.

News broke over the weekend that Rathbone Brothers was in advanced talks with rival Smith & Williamson about a potential all-share merger. If completed, the tie-up would be the latest in a wave of consolidation in the wealth management sector and create a group with £56bn of assets under management.

Combining the two businesses could bring significant cost and revenue synergies for the combined group through increased scale and improved cross-selling opportunities. Rathbone’s revenue growth outlook seems set to slow to the mid-single-digits over the next few years, but the merger could improve its growth prospects as the deal would expand its range of services at a time when clients are seeking ‎increasingly sophisticated services from wealth management firms.

Meanwhile, shares in Rathbones trade on a forward price-to-earnings ratio of 21.6. This may look like a demanding valuation at first glance, but seems justified to me given its sector-beating growth prospects and potential synergy benefits.

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Jack Tang 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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