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2 surprising growth stocks set to beat the FTSE 100

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Beating the FTSE 100 is never easy. However, for investors who are able to unearth stocks which offer high growth potential at reasonable prices, it is possible. That’s the case whether the index is trading at a record high or at a record low. With that in mind, here are two shares which could offer surprisingly robust earnings growth over the medium term. Due to their low valuations, they could outperform the wider index in 2017 and beyond.

Record results

Reporting on Wednesday was challenger bank Metro (LSE: MTRO). It achieved record deposit growth in the first quarter of 2017, with it exceeding £1bn for the first time. Deposits increased by 13% versus the prior quarter, while costs of deposits dropped from 66 basis points in the final quarter of last year to 61 basis points in the first quarter of 2017. Lending increased by 11% versus the prior quarter, while underlying profit before tax was £0.5m higher at £2m.

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A key reason for the improving performance of the business has been the focus on the integration of stores and technology. This has enabled Metro Bank to deliver three consecutive quarters of profitability, while customer numbers continue to swell. They increased by 72,000 accounts in the first quarter of the year so that there are now 987,000 customer accounts across the bank.

Looking ahead, Metro Bank is expected to make its maiden full-year profit in 2017 and follow this up with growth of 131% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.3, which indicates that its share price could continue to rise following its 23% gain since the start of the year.

Growth potential

Also offering upbeat growth potential is Georgia-focused TBC Bank (LSE: TBCG). Its shares have risen by 19% in the last six months and yet do not appear to be overpriced. They trade on a price-to-earnings (P/E) ratio of around 8.7, which indicates that they offer a wide margin of safety. This could prove to be necessary, since the company lacks geographic diversification. It may therefore be seen as relatively high risk by many investors.

Looking ahead, TBC Bank is expected to record a rise in its bottom line of 8% this year, followed by further growth of 14% next year. When combined with its relatively low P/E ratio, this puts it on a PEG ratio of only 0.8. This suggests that more share price growth could be ahead for the company.  

The income prospects of TBC Bank may also prove popular among investors at a time when inflation is edging higher. While it currently yields less than the FTSE 100 at 2.6%, dividends are due to rise by 36% over the next two years. This puts the bank’s shares on a forward yield of 3.5% for 2019. Since dividends are covered 4.4 times by profit, more double-digit growth could lie ahead over the medium term.

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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.

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