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Investing in the stock market can be a daunting task, especially when faced with the challenge of identifying undervalued stocks. However, a fund manager has recently handpicked two S&P/ASX 100 Index (ASX:XTO) shares that it believes are significantly undervalued. These two hidden gems are none other than Transurban Group (ASX: TCL) and Atlas Arteria Group (ASX: ALX).
The Fund Manager's Picks
Transurban Group operates toll road assets in both the US and Australia, while Atlas Arteria Group manages roads in France, Germany, and the US. It's important to note that both these companies have experienced a slump in their stock prices recently. Transurban's share price has plummeted by over 17% in the last six months, and Atlas Arteria's stock has declined by more than 16% in the past year.
The Impact of Higher Interest Rates
These declines can be attributed to the challenges presented by the current higher interest rates and bond rate environment. Despite these hurdles, toll roads have shown resilience. Atlas Funds Management, the fund manager, provided some reassuring insights into the ASX 100 shares Transurban and Atlas Arteria.
Toll Roads - Still Thriving
The quarterly update from Ampol Ltd (ASX:ALD) revealed an 11% increase in Australian fuel sales. This increase in fuel sales translated to a "strong" performance for toll road operators in October. Specifically, Transurban reported record average daily traffic across its network, with an impressive 2.5 million trips per day. This represented a 3% year-over-year increase in traffic.
Atlas Arteria also experienced a positive trend with traffic increasing by 2.3% in the last quarter, primarily due to growth in its French assets. This boost in traffic translated into a 6.1% growth in revenue. The fund manager predicts that the combination of quarterly escalators (price increases) on inflation-linked tolls and long-term fixed-rate debt will lead to expanding profit margins.
The Wisdom of Warren Buffett
The fund manager, Atlas Funds Management, reminded investors of a famous quote often attributed to Warren Buffett: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." This quote emphasizes the importance of a company's long-term performance in determining its true value.
The Case for Long-Term Investment
Despite the market's short-term fluctuations, some businesses are currently trading near the lows of March 2020. This is the case even for some ASX 100 shares that have exhibited better operational performance and higher profits in 2023. The investment team at Atlas Funds Management asserts that both Transurban and Atlas Arteria shares are trading at a remarkable 25% discount to their pre-COVID share prices, even in the face of higher traffic volumes and toll prices.
A 25% Discount to Pre-COVID Prices
To put things into perspective, since the beginning of 2023, the Transurban share price has decreased by 5.7%, and the Atlas Arteria share price has seen a decline of 17%. This reduction in share prices presents an exciting opportunity for investors to acquire shares in these companies at a substantial discount.
Share Price Snapshots
In conclusion, Transurban and Atlas Arteria, despite their recent challenges, have strong potential for long-term growth. Their ability to weather short-term market volatility and demonstrate resilience in the face of adversity makes them attractive investment options. With a 25% discount to pre-COVID prices, these ASX 100 shares may be the hidden gems investors have been looking for.
