While the FTSE 250 has gained around 45% in the last five years, it is still possible to find undervalued shares within the mid-cap index. Certainly, they may offer narrower margins of safety than they did a few years ago. But with the growth potential of the UK and world economies arguably being stronger than many investors expected, a buying opportunity could be on offer right now.
With that in mind, here are two shares which appear to be undervalued based on their growth outlooks. They may therefore be able to outperform the FTSE 250 over the long run.
Reporting on Tuesday was insurance and reinsurance specialist JLT (LSE: JLT). The company’s trading statement for the first four months of 2018 showed that it has made a strong start to the year given current trading conditions.
For example, its Global Reinsurance segment has made good financial progress, with the upbeat performances in 2017 in Europe and North America having continued into 2018. Similarly, its Global Employee Benefits division has traded impressively in the period, with Asia returning to growth and the UK continuing the momentum started in 2017.
Meanwhile, JLT’s Global Specialty business has achieved a number of client wins during the period following a change in management team. It expects to generate good organic revenue growth for the full year, with the US Specialty business on track to deliver continued revenue growth.
Looking ahead, the company is forecast to report a rise in its bottom line of 18% in the current year, followed by further growth of 19% next year. Despite such strong growth forecasts, it trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests that it offers a wide margin of safety and may be able to outperform the FTSE 250 in future years.
Also forecast to deliver strong earnings growth over the next two years is clothing brand and retailer Superdry (LSE: SDY). The company has been gradually improving its operational capabilities in recent years and now seems to have a solid platform to generate improving financial performance.
Under its current management team it has reorganised its business model and is now set to deliver earnings growth of 17% this year, followed by further growth of 15% next year. However, investor sentiment continues to be relatively weak, with the company’s share price having declined by 7% in the last year. This puts it on a PEG ratio of 0.9 and suggests that it could offer a wide margin of safety.
Certainly, the retail environment in the UK and internationally could experience headwinds if interest rates rise. But with a relatively low valuation, an improving business model and a strong management team, Superdry appears to offer significant growth potential which could allow it to outperform the FTSE 250 in future years.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK owns shares of Jardine Lloyd Thompson. The Motley Fool UK has recommended Superdry. 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.