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2 hot growth stocks with long-term potential

While the FTSE 100 may have reached record highs in recent months, there are still some stocks which appear to be undervalued. They may experience a rather uncertain period, with the result of the upcoming election less clear and Brexit talks likely to cause at least some disruption to investor sentiment. However, for long-term investors, now could be the perfect time to buy them. Here are two prime examples of stocks which appear to fall neatly into that category.

Improving results

Reporting on Monday was wealth management company AFH (LSE: AFHP). Its performance in the first six months of the current year has been impressive, with revenues increasing by 19%. Recurring revenue as a percentage of total revenue was 70% versus 66% in the same period of the prior year. This shows that the company’s income prospects may now be more stable than in the past, while a strong balance sheet could support further acquisitions in future.

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Strong growth in funds under management of 17% helped to push profit before tax 34% higher to £1.15m. The company could continue to benefit from changing regulations within the wealth management sector, where demand for lower-cost opportunities is causing greater consolidation. AFH’s £10m placing means its cash reserves of £12.6m could be used to fund further acquisitions.

Looking ahead, the company is expected to record a rise in earnings of 92% in the current year, followed by further growth of 28% next year. Despite such a strong growth outlook, AFH’s shares trade on a price-to-earnings growth (PEG) ratio of only 0.4, which suggests that now could be the right time to buy them. They may be 40% up year-to-date, but further share price gains could be on the cards in 2017 and beyond.

Income potential

Also offering an attractive investment proposition within the financial services sector is Personal Group (LSE: PGH). The employee benefits specialist has endured a somewhat mixed period in recent years, with profit growth swinging between positive and negative. However, during the last five years, it has been able to increase dividends per share at a brisk pace. They are up by 5% per annum during that time, which puts Personal Group on a dividend yield of 6.7% right now.

While the company’s dividend growth rate and mixed profit performance has meant that dividend cover is now only 1.1, Personal Group is forecast to increase its bottom line by 7% next year. This should mean that shareholder payouts become more affordable, and may mean they continue to beat the rate of inflation over the medium term.

With Personal Group trading on a price-to-earnings (P/E) ratio of 14, it appears to offer good value for money. That’s especially the case with a number of stocks within the financial services sector now trading at record highs as the FTSE 100 moves higher. As such, buying it could prove to be a shrewd move in the long run.

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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.