I think there are great benefits from investing in undervalued UK growth stocks right now. The trick is identifying those rare gems: undervalued stocks with promising growth potential. For that, I check certain metrics like price-to-earnings (P/E) to growth ratio (PEG) and future cash flow estimates.
I think I’ve found two lesser-known UK stocks that are perfect examples. Currently trading well below their estimated fair value, they look primed for growth.
Standard Chartered
With a £20bn market cap, Standard Chartered (LSE: STAN) is the fifth-largest bank on the FTSE 100. However, it won’t be found on the high street. The bank provides services mainly in Asian markets, with core operations in Singapore, Hong Kong and Dubai. But while it benefits from the growth potential in several emerging markets it also faces risk from political instability in these regions.
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The trailing P/E ratio is 8.1, slightly over the industry average but still good. And future cash flow estimates indicate the shares could be undervalued by 65%. With an even lower P/E ratio of 7.3, rival bank HSBC looks like better value. But the PEG ratio tells a different story: with earnings forecast to decline, HSBC’s PEG ratio is negative while Standard’s is 0.7.
Following positive Q1 2024 results, revenue is now forecast to grow at 14% per year. That’s significantly faster than the industry average of 3.9%. The average 12-month price target of £9.34 is 22% higher than the current price (although agreement among analysts is low). Since its post-Covid low of 336p, it’s up 126% — coincidentally a 22% annualised return.
So that seems like a realistic target to me.
However, if forecasts are wrong and a recession is coming, Standard Chartered could take a dive. That’s still a big risk but one I’m prepared to take. As part of my September rebalance, I plan to sell some of my HSBC shares and buy Standard Chartered instead.
TBC Bank Group
The £1.7bn TBC Bank Group (LSE: TBCG) is a much smaller outfit than Standard, providing services in Georgia, Uzbekistan and Azerbaijan. Up from £8.20 four years ago, the £29.60 shares may not sound cheap but I think they still have room to grow.
The price tumbled earlier this year after the Georgian government introduced a ‘foreign agents’ bill that many believe is intended to suppress government opposition. Ensuing protests sparked fears for the future stability of the country.
However, a solid set of Q2 results released earlier this month put things back on track. Revenue and income were up 17% and 12%, respectively, with a minor 2% drop in profit margins due to higher expenses. Revenue is now forecast to grow at 19% per year.
In addition to its growth potential, TBCG pays a reliable dividend with a yield of 6.8%. That could make it a great option for value investors looking to boost their passive income. However, without a notable track record, it’s difficult to gauge how reliable the payments are.
The ongoing political situation poses a significant risk to the stock, which is why I’ve hesitated to buy before. But the recent results give me confidence in the bank’s performance. I don’t want to miss another chance, so I plan to buy the shares as soon as I’ve freed up some capital.
