I think there are some great benefits to investing in undervalued growth stocks in the UK right now. The trick is to identify those scarce gems: undervalued stocks with promising growth potential. To do this, I look at certain metrics, such as the price-to-earnings (P/E) to growth ratio (PEG) and estimates of future cash flows.

I think I’ve found two lesser-known UK stocks that are excellent examples. Currently trading well below their estimated fair value, they look set to rally.

Standard Chartered

With a market capitalization of £20 billion Standard Chartered (LSE: STAN) is the fifth largest bank in the market FTSE100. But you won’t find it on the high street. The bank serves primarily Asian markets, with major operations in Singapore, Hong Kong and Dubai. But while it benefits from growth potential in several emerging markets, it also faces risks of political instability in those regions.

The P/E ratio is 8.1, slightly above the industry average but still good. And future cash flow estimates suggest the stock could be undervalued by 65%. With an even lower P/E of 7.3, a rival bank HSBC looks like a better value. But the PEG ratio tells a different story: with earnings forecast to fall, HSBC’s PEG ratio is negative, while Standard’s is 0.7.

Following positive Q1 2024 results, revenue is now forecast to grow by 14% per annum. This is 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 feeble). From a post-Covid low of 336p, it is up 126% – a coincident 22% annual return.

So I think this is a realistic goal.

However, if the forecasts are wrong and a recession comes, Standard Chartered could take a nosedive. It’s still a gigantic risk, but one I’m prepared to take. As part of the September rebalancing, I plan to sell some of my HSBC shares and buy Standard Chartered instead.

TBC Bank Group

£1.7 billion TBC Bank Group (LSE:TBCG) is a much smaller business than Standard, providing services in Georgia, Uzbekistan and Azerbaijan. Compared to £8.20 four years ago, shares at £29.60 may not sound low-cost, but I think they still have room to grow.

The price fell earlier this year after the Georgian government introduced a “foreign agencies” law that many say is aimed at suppressing government opposition. The ensuing protests have raised concerns about the country’s future stability.

However, a solid set of Q2 results released earlier this month put things back on track. Revenue and income grew 17% and 12%, respectively, with a petite 2% decline in profit margin due to higher costs. Revenue is now set to grow 19% annually.

In addition to its growth potential, TBCG pays a reliable dividend yield of 6.8%. This could make it a great option for value investors looking to escalate their passive income. However, without a track record, it’s challenging to tell how reliable the payouts are.

The ongoing political situation poses significant risks to the stock, which is why I was previously hesitant to buy. However, recent results give me confidence in the bank’s performance. I don’t want to miss another opportunity, so I plan to buy shares as soon as I free up some capital.