Which are the most undervalued ASX stocks right now?

Summary

  • Intrinsic value is the measure of what a company or an asset is worth.
  • Currently, the A2M share price is down 47.6% on YTD basis and 66.3% down from a year ago.
  • Webjet holds dominant market share and has a strong liquidity position, making it a strong candidate for recovery.

The whole essence of investing is buying securities that are undervalued and selling them at a higher value. There are various investment methodologies that follow a different course of action to select these undervalued securities, but it all boils down to the same goal of profiting from the value gap.

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This value gap often occurs due to constant flow of information/news/rumours that affect the buying/selling decisions of investors, leading to price fluctuations. Due to this, the price often goes beyond the perceived value (intrinsic value) of the company or falls below it. This provides an opportunity for investors to profit from buying when the share price has fallen below the perceived value of the company and selling when the price has risen above it.

How to gauge the intrinsic value of a company?

Intrinsic value is the measure of what a company or an asset is worth. There are various financial models, such as Discounted Cash Flow (DCF), which help in determining the valuation of a firm based on its estimated cash flows in the future. Also, financial ratios such as price to earnings ratio (P/E ratio), dividend yield, price to sales ratio etc. can help gauge the value of a business based on different parameters.

For example, the PE ratio compares the earnings per share to the price per share to gauge the value of the business. Similarly, dividend yield measures dividend per share with the price per share for the valuation. There are many such metrices to determine whether a company is undervalued or overvalued, taking different variables into consideration.

More often than not, the valuation of a company is the perceived value, in the sense that the value is based upon an investors’ knowledge of the business, his ability to forecast the future, etc. which vary from investor to investor. To make the job easy for you, here’s a list dairy firm .

Read More: Which are the 20 hottest fully franked dividend stocks?

  1. The A2 Milk Company Limited (ASX:A2M)

The A2 Milk Company has been among the favourites of investors over the last few years due to its strong performance and fast-growing business. However, unlike the pre-COVID scenario, the pandemic has put a dent in the company’s business. The COVID-19 pandemic severely impacted one of the company’s prominent sales channels, hurting the company’s outlook by various institutions, which eventually resulted in multiple downgrades.

As with all high-growth companies, even a slightest dent to the financial performance generally triggers a severe correction, which is what A2M had faced after the pandemic. Currently, the A2M share price is down 47.6% on YTD basis and 66.3% down from a year ago. But all the blows to the business have already been discounted in the price and the firm could do well from here on.

  1. Webjet Limited (ASX:WEB)

Webjet Limited is an Australia-based digital travel services provider, acting as an intermediary for its B2B clients in the travel accommodation market. The company also operates an online travel agency and provides transportation services such as motorhomes or cars on rent.

With the COVID-19 pandemic hitting the travel industry hardest, bringing it to a virtual standstill, Webjet was also not spared. According to the current WEB share price of AU$5.08, the market capitalisation of the company stands at around AU$1.92 billion, having eroded roughly 55% of its value after the pandemic.

However, the company holds dominant market share and has a strong liquidity position with a very competitive cost structure. All this makes it a good candidate for recovery as the travel industry rebounds.

  1. Megaport Limited (ASX:MP1)

Megaport provides cloud services in 130 cities across 23 countries and is a global pioneer in NaaS (Network-as-a-Service). Since the onset of COVID-19, cloud computing is becoming ubiquitous with working-from-home regime. The NaaS sector alone is estimated to grow at an unprecedented pace of 35% CAGR over the next 4 years.

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With a high-quality list of partners and customers such as Tesla, BHP, Zoom, Adobe, BHP, the company does not have to worry much about its revenue growth in the coming years.

As investors rotate from high growth stocks to value stocks and vice versa, they tend to fall out of temporary sentiments, but companies such as Megaport are expected to benefit permanently from post-COVID work regime due to its continuous demand. The MP1 shares are currently trading about 25% up this year, after being down 20% in April; it has already started to reap benefits of easing restrictions.

Read More: Three ASX shares that are trading at a bargain

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