Finding shares which offer high growth prospects is not particularly challenging. Even when the outlook for the global economy is decidedly uncertain, it is still possible to find a long list of companies with double-digit earnings growth forecasts. However, finding such companies while they offer a wide margin of safety via a low valuation can prove to be much more challenging. Here are two stocks that appear to do just that, and which have the potential to beat the FTSE 100.
Thursday’s trading update from private healthcare group Mediclinic (LSE: MDC) shows that its current strategy is working well. Its largest platforms in Switzerland and South Africa, as well as its Dubai business, all performed in line with expectations in 2017. While its Abu Dhabi business was negatively impacted by regulatory change as well as operational difficulties, this was already priced into the company’s valuation. As such, its shares moved over 3.5% higher on the day of release.
Mediclinic is rightly focused on stabilising its underperformance in the Middle East. It remains optimistic about the long-term growth opportunities which the region offers. However, the reality is that it may take some time to turn around the disappointing performance in Abu Dhabi. As such, a downgrade to forecasts cannot be ruled out over the next couple of years.
Still, Mediclinic is expected to record a rise in its earnings of 23% in the current year, followed by growth of 14% next year. Since it trades on a price-to-earnings growth (PEG) ratio of 1.1, its shares seem to offer a sufficiently wide margin of safety to merit investment. While risk may be relatively high, the potential rewards on offer could be much higher than those of the FTSE 100.
Improving investor sentiment
Since the start of the year, the share price of specialist behavioural health services company Cambian (LSE: CMBN) has risen by 21%. This indicates that investor sentiment is improving and could continue to do so over the medium term.
Although Cambian is due to report a fall in its bottom line of 53% for the 2016 financial year, its upbeat growth outlook could lead to further capital gains for its investors. For example, its earnings are forecast to rise by 35% this year and by a further 20% next year. This could prompt further improvements to investor sentiment. Despite this positive outlook, the company’s shares trade on a PEG ratio of 0.9, which indicates there is scope for further capital gains over the medium term.
Certainly, Cambian’s track record of growth is relatively unstable. This means that its shares could be volatile over the coming months. However, there appears to be scope for it to outperform the FTSE 100 – especially while it trades at a relatively high level which is close to an all-time high.
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Peter Stephens 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.