With the FTSE 100 reaching 7,500 points for the first time this week, it may seem rather strange to declare any stock as being undervalued. After all, share prices are generally at their highest ever levels. However, there are still a number of stocks which offer a potent mix of strong growth prospects and low valuations. Here are two prime examples which could be worth buying for the long term.
Growth potential
Reporting on Tuesday was residential developer Crest Nicholson (LSE: CRST). Its trading continues to be in line with expectations and the company is on target to deliver growth in unit sales. It is also on track to post a 10% rise in revenues for the current financial year. This shows that while house prices may be coming under a degree of pressure, the overall outlook for the housing market remains generally positive.
A key reason for this is the strong demand and wide availability of mortgages to first-time buyers. The mortgage market is highly competitive and this should help housebuilders such as Crest Nicholson perform relatively well even if house prices edge lower. In fact, the company is expected to report a rise in its bottom line of 8% in the current year, followed by further growth of 11% next year.
Despite an above-average growth rate, Crest Nicholson trades on a price-to-earnings growth (PEG) ratio of only 0.7. This suggests that it offers growth at a very reasonable price, and that its risk/reward ratio remains compelling. Certainly, further volatility and challenges in the housing market cannot be ruled out. But with a wide margin of safety, Crest Nicholson could offer index-beating performance over the long run.
New opportunities
Also offering high growth potential at a low price is personal care and beauty specialist Swallowfield (LSE: SWL). It is a company in a period of intense change, with its recent acquisition of The Brand Architekts paving the way for a more successful and profitable future. The integration of the company is going as planned according to Swallowfield’s recent update. And with its manufacturing division performing well, its outlook remains highly positive.
In fact, Swallowfield is expected to record a rise in its bottom line of 17% in both of the next two financial years. This is more than twice the forecast growth rate of the wider index, and yet the company trades on a discount valuation. For example, it has a PEG ratio of only 0.8, which suggests the market has not yet fully factored-in its improving financial outlook.
With the original Swallowfield brands showing improving performance and the company seeking to deliver a cost optimisation programme, an upgrade to its outlook would not be surprising. As such, now could be the right time to buy it – even when the FTSE 100 and share prices in general continue to move towards record highs.