I’m one of those investors that dreams of, and has a plan, to create a £1m ISA. To do this I want to identify undervalued growth shares that other investors are missing — shares you might think of as being hidden gems.
A growth share the could turn around
I think one such company is Driver Group (LSE: DRV). It combines a cheap valuation, decent return on capital employed (ROCE), and, before the pandemic, strong operating profit growth. It has also promoted a new chief executive internally. In other companies, this has sometimes helped lift sentiment towards a company as the strategy evolves.
Driver Group provides construction industry expertise, particularly around dispute resolution. Given a lot of countries will boost infrastructure spending post pandemic the pipeline of work could well grow.
I think the reason this company is cheap is because it hasn’t always performed brilliantly in the past. It went a few years without paying a dividend. I believe new management will want to make sure the future is brighter. To achieve this they have made some changes.
The group has opened an office in New York and restructured the Middle East and the Asia Pacific operations to meet the changing business demands in those regions. Given how cheap the shares are on a price-to-earnings ratio of only around 11, I think the shares could help me towards a £1m ISA.
Potential for growth and strong fundamentals
Shares in the pawnbroking business Ramsdens (LSE: RFX) also combine many of the same features as Driver Group – cheap (the P/E is six), high ROCE (around 21%), and strong operating profit growth. Pawnbrokers also haven’t closed down during the pandemic, as they are classed as essential.
This isn’t the kind of company that would get investors excited. It’s a declining industry and yet Ramsdens, alongside H&T (also a listed business), seem like overlooked investments because of this.
Looking at the fundamentals I think it’s a strong business. It’s profitable, pays a dividend, and there’s real demand for its services.
Also, as the industry shrinks, it’ll consolidate into fewer players, so Ramsdens can pick up market share. This all means it could end up being added to my portfolio at some point in the future.
A distributor boosted by e-commerce growth under lockdown
Packaging and distribution group MacFarlane (LSE: MACF) is another business I like the look of. The Glasgow headquartered business is the largest distributor of protective packaging products and services in the UK. The business has been hit by Covid-19, but not that hard and I think is well positioned to recover. For example, in the six months to 30 June 2020, operating profit was £4,264,000 versus £4,873,000 in the corresponding period the year before.
Given the huge impact Covid-19 has had on many businesses, this doesn’t strike me as being too severe. I think MacFarlane is helped by serving growth markets like e-commerce.
The board is now restoring the dividend, which is a boost for investors. I have a lot of confidence in the business in the future. I’m likely to add it to my own portfolio.
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Andy Ross owns no share 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.
Motley Fool UK 2020