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The market is undervaluing these stellar stocks by 25%

It may be difficult to describe a share trading at a full 26 times trailing earnings as significantly undervalued, but I believe this is the case with Ted Baker (LSE: TED). This clothing retailer has been one of the great success stories of the past decade as the company has conquered the UK and has also been proving successful overseas. However, despite continuing to post great results its share price is down over 9% in the past year due to broader headwinds hit the retail sector and wider fears of an economic slowdown in the UK.

That said, this downward share price movement might have created a fantastic point for investors on the outside looking to begin a position. Why? Because Ted Baker is not only surviving the problems that are affecting all high street retailers but is also growing overall sales at an impressive clip by improving online offerings and attacking foreign markets.

Ted Baker’s resilience in the face of declining high street footfall is evidenced by the company’s ability to keep revenue per square foot in the UK and Europe flat year-on-year in the first half of 2016. And stable sales in retail locations are being buttressed by strong growth from e-commerce, which grew a stunning 26.5% in the same period in the UK and Europe.

But the real reason I reckon Ted Baker’s share price has room to grow by at least a quarter is the aforementioned international expansion. Year-on-year sales in North America and Asia grew a whopping 23.6% and 6% respectively in constant currency terms in the six months to August, and together now account for 31% of group sales. Yet with only 106 locations in North America and 81 in Asia compared to 283 in the UK and Europe it’s quite clear that if Ted Baker can become as popular with Americans and Chinese as it is with Brits there’s staggering growth potential.

Sweet spot

The sugar industry may not be as sexy as selling edgy clothes to millennials but that doesn’t mean shares of Tate & Lyle (LSE: TATE) can’t increase by at least 25% in the coming years. The company is the maker of bulk products such as high fructose corn syrup as well as brands such as Splenda. And the reason I see upside there is that its shares are valued quite cheaply at 15 times forward earnings and the firm is shifting focus to high margin speciality products.

Tate & Lyle’s management is rightly pinning future on the growth of specialist brands such as Splenda that are increasingly popular with consumers as an alternative to regular sugar. This is where Tate & Lyle has a competitive advantage and it has been exploiting it with aplomb recently as constant currency profits from the division jumped 12% in the first half of fiscal year 2016. And when accounting for the benefits of the weak pound, profit growth was an even more impressive 25%.

Operating margins from the speciality food segment are a very impressive 19%, well above the 8% operating margins in the bulk ingredient business. As Tate & Lyle grows this division by leaps and bounds due to shifting consumer habits, I reckon the shares are quite attractively priced, especially when considering their 4.16% annual dividend yield.

But for a truly impressive dividend yield, I recommend checking out the Motley Fool’s free report on an under-the-radar income stock that has increased dividends over 400% in just the past four years.

This stunning income potential combined with earnings that cover current payouts three times over was enough to have it named the Motley Fool’s Top Income Share.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Ted Baker plc. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.