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2 dirt-cheap growth stocks that could make you brilliantly rich

Shares of AFH Financial (LSE: AFHP) are up 3% at 255p today after the fast-growing wealth management firm released a trading update for its financial year ended 31 October. This revealed that the strong growth reported in the company’s half-year results has continued through to the year-end, with revenue expected to exceed £33m, up 35% on the prior year, and funds under management up to over £2.7bn from £2bn.

This AIM-listed firm has a market cap of £78m and I see it as a dirt-cheap growth stock that continues to fly under the radar of many investors. I’d be happy to buy a slice of the business today, as I reckon the shares can rise a lot higher, driven not only by strong increases in earnings, but also by a potential re-rating as the firm gains wider attention.

Hugely attractive valuation

AFH is delivering tremendous organic growth, as well as proving itself to be a shrewd acquirer and consolidator in the sector. The latter provided half of the year’s top-line growth and I expect more of the same, with the company telling us today that it had £8m cash on the balance sheet at the year-end and a “strong pipeline of potential acquisitions currently under negotiation.”

As revenues increase, we can expect profits to rise even faster, due to margins expanding under operational gearing. For example, ahead of today’s update, a broker forecast had revenue rising 31% but earnings per share (EPS) increasing 93%, followed by a 27% rise in revenue and a 53% increase in EPS for fiscal 2018.

I expect to see the forecasts upgraded after today’s news that fiscal 2017 revenue was up 35%. However, even based on the pre-update forecasts, the valuation looks cheap. The forward price-to-earnings (P/E) ratio stands at 12, while a price-to-earnings growth (PEG) ratio of 0.22 indicates great value against the PEG ‘fair value’ marker of one.

Finally, this growth stock is also a highly cash generative business, paying a small but fast-growing dividend, which is forecast to yield 1.8% for fiscal 2018. The dividend only adds to my conviction that AFH is a hugely attractive stock to buy at the current share price.

Bargain-basement rating

Also offering terrific growth appeal, in my view, is Highland Gold Mining (LSE: HGM). This established Russia-focused miner, which counts Chelsea FC owner Roman Abramovich among its major shareholders, posted solid first-half results in September. It said it was well placed to meet its production guidance for the full year, as well as making “substantial progress in each of the projects targeted for the company’s future growth.”

Reporting at the end of Q3 last month, it said it now expects production for the year to be near the upper end of its guidance range. This leads to some very attractive financials. The City consensus forecast is for EPS of 21 cents (16p at current exchange rates), 45% ahead of last year. At a current share price of 147p, the P/E and PEG are at bargain-basement levels of 9.2 and 0.2, respectively.

What’s more, in addition to its growth prospects, Highland Gold has a significant focus on delivering generous dividends for its shareholders. A current-year forecast payout of 11 cents (8.4p) gives a terrific yield of 5.7%. Listed on AIM and capitalised at £478m, this is another under-the-radar stock I rate a ‘buy’.

Could there be an even better growth prospect?

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G A Chester has no position in any of the 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.