Investing in growth shares can be a great way to generate long-term wealth. If earnings increase as sharply as brokers expect, they could deliver significant returns as their share prices appreciate.
Targeting cheap growth stocks can be an even more lucrative tactic. Buying undervalued stocks provides the potential for superior capital gains over time. The theory is that they’ll rise in price once the market recognises their undervaluation.
So which low-cost growth shares are worth close attention today? Here are two I think investors should check out.
Value hero
As the owner of Primark, Associated British Foods (LSE:ABF) has an excellent opportunity to grow earnings over time.It will have to navigate an incredible competitive marketplace. It may also lose customers to clothing retailers with more sophisticated online channels.
However, soaring demand for so-called fast fashion puts market leaders like Primark in the box seat to enjoy strong and sustained earnings growth.
Latest financials showed like-for-like revenues up 2.1% in the 24 weeks to 2 March, the company reporting “good performance across most markets due to pricing and well-received product ranges“.
On a statutory basis, sales were up 7.5% year on year, reflecting the retailer’s successful strategy of increasing its store estate.
Encouragingly, Primark plans to continue aggressively expanding too. It plans to have 530 stores operating across the globe by the end of 2026, up from around 440 today.
With its food and ingredients businesses also performing strongly, City analysts think ABF’s earnings will rise 35% this financial year (ending September). They think the bottom line will swell another 6% next year too.
As a result, the FTSE 100 share trades on a price-to-earnings growth (PEG) ratio of just 0.4. Any reading below 1 implies that a stock’s undervalued.
ABF’s share price sank in May on news that its majority shareholder had sold 10.3m shares. And it has continued to trickle lower since then. For long-term investors, I think this represents an attractive dip-buying opportunity.
Defence star
Conditions in the defence sector are the strongest they’ve been for decades. It’s a landscape that analysts think will thrust Babcock International Group‘s (LSE:BAB) profits significantly higher.
International relations are unfortunately deteriorating between the largest military powers, leading to rapid rearming across the globe.
And so Babcock — which supplies engineering services in Europe, Africa and Oceania — reported sales and underlying profit growth of 11% and 34% respectively in the last financial year (to March).
Its order backlog also grew around $800m over the period, to $10.3bn too. This provides the potential for significant earnings growth in the coming years. Right now, City brokers predict a 32% rise for this year, and a 12% increase in fiscal 2026.
As an added bonus, these forecasts also leave Babcock shares trading at bargain-basement levels. They deal on a forward PEG ratio of 0.4.
Lumpy defence contract timings can throw earnings forecasts off course. But, on balance, I think this industry heavyweight is a top stock for investors to consider.
