Some of the best investments may not appear to be particularly attractive when they’re first purchased. Their valuations are often low, which suggests they’re unpopular among investors. However, through buying stocks when they are low in value, it’s possible for any investor to generate high capital returns in the long run.
With that in mind, here are two shares which appear to be grossly undervalued given their financial forecasts.
Reporting on Wednesday was Gem Diamonds (LSE: GEMD). The diamond miner reported that 2017 was a difficult year, with its profitability coming under pressure. However, it began to see the impact of changes made to its business model in the second half of the year. For example, there was a significant improvement in the recovery of large diamonds. And with prices continuing to be buoyant, the prospects for the business appear to be bright.
In addition, Gem Diamonds is aiming to become more efficient. The company is targeting the delivery of $100m in cost savings by the end of 2021. It will also seek to deliver $30m in cost savings a year after that date.
But looking ahead, the company is forecast to experience a volatile financial performance over the next two years. Clearly, its profitability is highly dependent on the underlying diamond market. However, with a price-to-earnings (P/E) ratio of around 7, the stock appears to be undervalued at present. While this suggests it’s unpopular among investors and may be a volatile investment, it could also prove to be a highly profitable purchase in the long run.
Also offering the potential to generate high returns in the long term is gold miner Centamin (LSE: CEY). The company is expected to report a 38% rise in its current-year bottom line, with solid production levels and a firm gold price helping to boost its outlook.
Despite such a high rate of growth, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.4. This suggests it could generate further capital growth in the long run — even after rising by 160% in the last five years.
Certainly, the outlook for the gold price remains uncertain in the near term. Investors may become more bullish about the prospects for the global economy and this may lead to reduced demand for safer assets. However, the prospect of a period of higher inflation over the coming years remains likely and this could ultimately lead to more favourable trading conditions for Centamin and its peers.
As such, now could be the perfect time to buy. Alongside its capital growth potential, it may offer some defensive characteristics in case the recent volatility in share prices continue. This means that it could be a worthwhile addition to a mix of investor portfolios for the long run.
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Peter Stephens owns shares in Centamin. 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.