Why are these ‘hidden’ growth heroes still so cheap?

Harvey Jones says these two companies deserve more popular acclaim among investors.

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When a stock outstrips the wider market you would typically expect to see it trading at a heady valuation. Yet the following two growth heroes have attracted surprisingly little investor acclaim. What gives?

Prudential

Insurer Prudential (LSE: PRU) has been a long-standing favourite in my portfolio and is up 115% over the last five years, almost five times the return on the FTSE 100 as a whole. Investors broadly approve of its strategy, which involves piling into Asia to serve the region’s increasingly wealthy and expansive middle class, who are clamouring for pensions and protection due to the shortage of state provision. Asia accounts for roughly one-third of company profits and rising.

Prudential was tripped up by the recent slowdown in China and emerging markets, which hit performance over the last two or three years, but it seems to have worked around that hurdle, its share price up a third in the last 12 months. So why does this global growth prospect trade at just 12.46 times earnings?

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True to Pru

It suggests lingering uncertainty over China, where GDP growth is at a 25-year low (although still healthy by Western standards). But China is holding up for now. Perhaps investors are disappointed by the low yield of 2.45%? Then again, Pru’s yield is low largely because share price growth has been so high. The dividend is also progressive, with management aiming to increase it by 5% a year. Covered 3.2 times, it must be one of the safest on the FTSE 100.

Pru continues to pile on new business, up from £1.66bn to £1.97bn in first nine months of last year, with annual premium equivalent sales up 16% to £4.55bn. Earnings per share (EPS) did turn negative in 2016, falling 10%, but are forecast to leap 16% this year, and another 8% next. I remain a long-term fan with no plans to shift allegiance: my aim is Pru.

Taylor Wimpey

House builder Taylor Wimpey (LSE: TW) is another under-appreciated growth hero, with its share price rising 300% in the last five years, 12 times the FTSE 100’s return. Yet today, it trades at just 11.83 times earnings. This is partly down to ongoing Brexit uncertainty as the housebuilding sector was one of the hardest hit by the shock referendum vote. It also reflects fears about the sustainability of UK property prices.

Last month’s trading update showed the company largely unruffled by these concerns, celebrating “an increase in housing completions and robust trading despite wider macroeconomic uncertainty,” with profits coming in at the top end of expectations.

Building blocks

Its share price is up 22% over the last three months, as investors creep back into the sector. However, there are signs that the housing market is finally losing its mOno, with house prices falling £2,000 in January, according to yesterday’s figures from Halifax.

Taylor Wimpey’s forecast yield of 7.8% partly reflects this uncertainty, as it looks unsustainable at that level. Five consecutive years of double-digit EPS growth are forecast to slip into single-digits, but are still positive at 4% this calendar year and 5% in 2018. So there are reasons why investors are cautious about Taylor Wimpey, but this is a good reason to start building your position now.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones owns shares of Prudential. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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