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2 ‘undervalued’ growth shares I’d buy in May

Finding stocks which offer better growth prospects than anticipated is more common than many investors realise. Certainly, markets are relatively efficient, but doubts surrounding a stock or a sector can lead to share prices which prove to be undervalued. With that in mind, here are two shares which could deliver better capital growth performance than the market currently anticipates.

Solid performance

While the outlook for UK retailers is relatively downbeat, Primark continues to outperform its peers. Its parent company, ABF (LSE: ABF), reported solid progress on Wednesday in its results for the 24 weeks to 4 March. Primark recorded a substantial increase in selling space, which when coupled with its improving consumer offering allowed it to grow market share of the clothing market. In fact, Primark’s growth contributed to a 23% rise in adjusted operating profit for ABF during the period.

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Looking ahead, more growth could be on the horizon. Primark has historically performed well when shoppers find their disposable incomes squeezed and they trade down to budget operations such as Primark. As such, rising inflation and uncertainty for the UK’s economic outlook could be good news for the business and for ABF.

ABF trades on a price-to-earnings (P/E) ratio of 25.8, which may seem high given the uncertainty surrounding the outlook for the UK retail sector. However, with earnings due to rise by 13% this year, the company’s price-to-earnings growth (PEG) ratio of less than two indicates that now could be a perfect time to buy. The company has a diverse business model and may benefit from a further weakening of sterling over the medium term.

Growth potential

Also having the potential to deliver rising profitability over the medium term is pawnbroker H&T (LSE: HAT). Its performance as a business suffered a few years ago, with double-digit declines in its bottom line. However, it has arrested the decline and posted two consecutive years of double-digit rises in profitability.

Looking ahead, the company could benefit from a squeeze on consumer spending. Pawnbrokers became increasingly popular during the credit crunch, when people sought to monetise assets such as gold and jewellery. While the outlook for the UK economy may not be as severe as in 2008, there is the potential for a real-terms decline in consumer disposable incomes. As such, H&T is forecast to record a rise in its bottom line of 8% in the current year, followed by further growth of 20% next year.

With the company’s shares trading on a PEG ratio of just 0.6, now appears to be the right time to buy them. They currently yield 3.4% from a dividend which is covered 2.2 times by profit. As such, they could become increasingly popular if their dividend growth rate beats inflation over the long run. This could translate into significant capital growth for the company’s investors.

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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.