These small-cap growth stocks look significantly undervalued

FTSE 100 rising prices

With the FTSE 100 trading close to a record high, it may seem as though all stocks are highly valued. While in some cases this may the case, there continue to be a number of growth stocks which could offer high share price returns in the long run. Certainly, their outlooks may be somewhat risky, due in part to their size and lack of scale. However, here are two companies which could prove to be highly profitable investments over a sustained period.

Positive update

Reporting on Thursday was Sprue (LSE: SPRP), one of Europe’s leading developers and suppliers of home safety products. It released an AGM statement which caused its share price to soar by around 10%, as investors became increasingly positive regarding its growth outlook.

Sprue has made a good start to the current year, with an expected strong return to profitability in the first half of the year. The business has seen an improvement in gross margin, as well as a reduction in overheads, which could position it for rising profitability over the medium term. This is set to be aided by the new manufacturing and distribution arrangements which were recently announced by the company. They should strengthen its position within key markets across Europe and enhance its product offering.

Looking ahead, Sprue is forecast to record a rise in its bottom line of 128% this year, followed by further growth of 32% next year. Even after a 21% share price rise since the start of the year, it continues to offer excellent value for money based on its forecasts. For example, it trades on a price-to-earnings growth (PEG) ratio of just 0.5, which suggests that now could be the perfect time to buy it.

Growth potential

Also offering strong growth prospects is specialist in the provision of testing systems to the global motor industry Ab Dynamics (LSE: ABDP). It is expected to report a rise in its bottom line of 22% next year, which comes after a period of strong growth for the business. For example, in the last three years it has been able to increase its bottom line at an annualised rate of around 22%. This shows that the business may offer a degree of consistency, which could mean it justifies a higher valuation.

In terms of its rating, Ab Dynamics appears to have significant upside potential. It currently trades on a price-to-earnings (P/E) ratio of 25. When combined with its forecast earnings growth rate, this equates to a PEG ratio of around 1.1. This indicates that more share price growth could lie ahead following its 40% rise over the last year.

In terms of a catalyst to push its share price higher, Ab Dynamics is expected to increase dividend payments by around 10% per annum during the next two years. Although this will still mean a lowly dividend yield of 0.6%, with shareholder payouts covered around seven times by profit, more dividend growth could be on the horizon.

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More reading

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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