Investing in growth stocks can be an effective way to create great long-term wealth. If these companies succeed in growing profits above the market average, their stock prices can increase significantly, leading to substantial capital gains for investors.
Investors can target even greater share price appreciation if they choose stocks that are undervalued. The theory is that they will rise sharply from current levels as the market eventually wises up to their investment potential.
2 top growth shares
Combined, these qualities have the potential to provide stunning shareholder returns over the long term. So I’ve been searching for the best cheap growth shares to buy in September if I — as expected — have spare cash to invest.
Here are two of my favourites:
| Company | Forecast earnings per share (EPS) growth | P/E ratio | PEG ratio |
|---|---|---|---|
| Pan African Resources (LSE:PAF) | 58% | 6.8 times | 0.1 |
| NCC Group (LSE:NCC) | 125% | 19.6 times | 0.2 |
You’ll see that these growth shares trades on a low price-to-earnings (P/E) ratio and/or price-to-earnings growth (PEG) ratio. A PEG ratio of below 1 implies a stock’s undervalued relative to its predicted earnings.
Here’s why I think these stocks are steals right now.
Golden profits growth
Owning mining stocks like this one can be a troubling experience when commodity prices fall. They can also be uncomfortable purchases if exploration, development or production problems occur.
However, over the long term, purchasing stocks like Pan African Resources can be a lucrative endeavour. With gold prices hitting fresh records on a regular basis, now could be a particularly great time to considering buying in too.
Gold values are tipped by many analysts to keep rising as central banks cut interest rates, and conflicts in Eastern Europe and the Middle East intensify.
With Pan African Resources’ Mogale Tailings Retreatment (MTR) project due to produce first gold later this year, the company’s earnings are tipped to soar soon and then rise another 29% next year. I don’t think these factors are reflected in the South African miner’s rock-bottom valuation.
A secret value star
Tech stocks like NCC Group often command high valuations. In this case, investors think its expertise in cybersecurity software could deliver stunning profits growth, hence its forward P/E ratio of nearly 20 times.
However, a look at the company’s sub-1 PEG ratio suggests its shares are actually grossly undervalued.
NCC Group’s struggled more recently due to the tough economic environment. Sales dropped 3.2% in the 12 months to May, meaning the firm swung to a £21.5m operating loss from a £1.9m profit the year before.
But conditions are steadily improving, with its core cybersecurity unit moving back into growth in the second half. Risks are still there, but NCC’s long-term outlook remains an exciting one, in my opinion.
The cybersecurity market’s tipped for rapid growth over the next decade. And heavy restructuring should put the FTSE 250 company in a better position to capitalise on this. Its plan to create a wide suite of client solutions could also reap massive rewards in its fast-growing industry.
