FTSE 250: 3 dirt-cheap growth shares I’d buy for my ISA

Paul Summers picks out three stocks from the FTSE 250 (INDEXFTSE:MCX) he thinks look undervalued, based on their growth prospects.

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As someone who doesn’t intend to retire any time soon, I’m always on the lookout for the best growth stocks I can buy. When I can pick these up at what appear to be discounted prices, all the better.

With this in mind, here are three such shares from the FTSE 250 I’d add to my ISA portfolio today.

TI Fluid Systems

TI Fluid Systems (LSE: TIFS) is the go-to option for car manufacturers looking for components to move fluids around inside their vehicles. Its operations stretch over 28 countries, giving the company great geographical diversification. However, the chief reason it’s caught my eye is that it looks very attractively-priced for the growth on offer.  

Right now, I can pick up the stock for under 16 times earnings. That already looks pretty decent value, relative to the levels of some stocks in the FTSE 250. And the price-to-earnings growth (PEG) ratio for FY21 is just 0.3. As a general rule of thumb, anything at or below 1.0 on this metric suggests the market is undervaluing the company. 

Of course, numbers never tell the full story. A key risk with TIFS is that it could be impacted by the ongoing issues with supply chains currently dogging the automotive sector.

Another thing worth mentioning is the ‘free float’. A relatively low number of shares (as a percentage of total equity) currently trade on the market. Theoretically, this could make TIFS’ price more volatile than other mid-tier stocks.

As long as I can remain focused on the long term, however, this looks like a good investment for me.

Redrow

As a (mostly) growth-focused investor, I’ve long regarded housebuilders as more suitable for a wholly income-focused portfolio. Perhaps I’ve been overly cautious. After all, some companies in this sector look temptingly priced for the growth they offer.

One example from the FTSE 250 is Redrow (LSE: RDW). We’ve seen a post-lockdown housing boom, but its shares now trade on less than 10 times earnings. More importantly, a forward PEG ratio of 0.5 is also very low. 

Of course, a key question now is whether recent activity will now decline as more people return to the office, others get laid off, and government incentives end. In fact, there are signs this is already happening

Still, I’m encouraged by RDW’s most recent update. Back in July, it reflected on having a “very strong” order book. Its sales market also “remains robust“. This leads me to suspect that buying for my ISA now could still work out well. 

Coats

A final ISA buy is industrial threads and fasteners manufacturer Coats (LSE: COA). A world leader at what it does, the business also has great earnings diversification, supplying products to industries such as apparel, transportation and telecoms.

Once again however, it’s the valuation that appeals. Coats’ forward PEG is bang on 1 at the moment. So, while not being as undervalued as the other two stocks mentioned, it feels like I’d be getting a good price based on this penny stock’s prospects.

Naturally, there are still risks here. A growing awareness of just how unfriendly fast fashion is for the environment could impact clothing sales and, by association, profits at Coats. Debt has also been creeping up over the years and could be worth watching.

On balance though, I’d still buy today. 

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Coats Group and Redrow. 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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