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I believe that investing in undervalued UK growth stocks at the moment has huge benefits. The trick is to identify those rare gems – undervalued stocks with promising growth potential. To do this, I monitor certain metrics such as the price-to-earnings (P/E) to growth (PEG) ratio and future cash flow estimates.
I think I have found two lesser-known UK stocks that are perfect examples. They are currently trading well below their estimated fair value and look set for growth.
Chartered standard
With a market capitalisation of £20 billion, Chartered standard (LSE: STAN) is the fifth largest bank in the world. FTSE 100 IndexHowever, you won't find it on the high street. The bank primarily serves Asian markets, with core operations in Singapore, Hong Kong and Dubai. But while it benefits from growth potential in several emerging markets, it also faces the risk of political instability in those regions.
The closing P/E ratio is 8.1, slightly higher than the industry average, but still good. And forward cash flow estimates indicate the stock could be undervalued by 65%. With an even lower P/E ratio of 7.3, rival bank HSBC Bank It looks like better value for money, but the PEG ratio tells a different story: with earnings forecasts falling, HSBC's PEG ratio is negative, while Standard's is 0.7.
Following positive Q1 2024 results, revenue is forecast to grow by 14% annually, significantly faster than the industry average of 3.9%. The average 12-month target price of £9.34 is 22% above the current price (although consensus among analysts is low). From its post-Covid low of 336p, it is up 126%, which coincidentally represents an annualised return of 22%.
So I think that's a realistic goal.
However, if the forecasts are wrong and a recession is looming, Standard Chartered could collapse. It is still a significant risk, but one I am prepared to take. As part of my September rebalancing, I plan to sell some of my HSBC shares and buy Standard Chartered shares.
TBC Banking Group
The 1.7 billion pounds TBC Banking Group (LSE:TBCG) is a much smaller company than Standard, offering services in Georgia, Uzbekistan and Azerbaijan. Its share price of £29.60 may not have seemed cheap four years ago, but I think it still has room for growth.
The price plummeted earlier this year after the Georgian government introduced a bill on “foreign agents” that many believe is aimed at suppressing opposition to the government. Subsequent protests sparked fears about the country’s future stability.
However, a strong set of second-quarter results released earlier this month got things moving again. Revenue and profit rose 17% and 12%, respectively, with a small 2% dip in profit margins due to higher expenses. Revenue is now forecast to grow at a 19% annual rate.
In addition to its growth potential, TBCG pays a reliable dividend with a 6.8% yield. This could make it a great choice for value investors looking to boost their passive income. However, without a notable track record, it is difficult to assess the reliability of the payouts.
The current political situation poses a significant risk to the stock, so I was hesitant to buy earlier. But recent results give me confidence in the bank's performance. I don't want to miss another opportunity, so I plan to buy the stock as soon as I have freed up some capital.
