- Stocks trading at a price less than their intrinsic value are usually considered to be the value stocks
- Though there are various combination of parameters to identify, lower Price to Earnings Ratio of the businesses is one of the common indicators of value stocks
- Many investors tend to consider PEG ratio in addition to P/E ratio because it considers estimated earnings of the company
Usually, stocks trading at a price less than their intrinsic value are known as value stocks. Intrinsic value is arrived upon valuing their fundamentals, such as dividends, earnings, and sales. Some investors tend to include these stocks in their portfolio as they probably have a potential upside and therefore, offer a margin of safety to some extent by not being overvalued.
Buying value stocks is different from buying cheap stocks. A cheaper price cannot be a yardstick to identify value stocks. Buying value stocks is an altogether a different ball game. However, a cheaper price can be a good starting point to identify good value stocks. For our analysis, we have chosen stocks which are currently hovering around their 52-week low price level.
In addition, most of the investors seeking value stocks use some metrics to identify whether the stock is undervalued or not. Two factors which we have used in our analysis to identify value stocks are: Price-to-Earnings and PEG ratios.
- Value stocks tend to have a lower P/E ratio in comparison to their peers
Usually, a lower Price to Earnings Ratio of the businesses is one of the most common indicators of value stocks. As the stock price trades lower in contrast to its fundamentals, the stock is likely to be undervalued. A surge in pricing is expected, and street-smart investors would like to buy the stock at the current price, which is a great bargain before the market corrects it. Investors make a profit when the stock price goes higher. Generally, a lower P/E ratio is preferable in comparison to the sector.
- PEG ratio should be ideally less than 1
Price Earnings Ratio is adjusted for it estimated future earnings by dividing it by EPS Growth rate to arrive at PEG ratio. Many investors tend to consider PEG ratio in addition to the P/E ratio because it considers the estimated earnings of the company. Simply looking at a P/E multiple might not reflect the complete picture of the company. Value stocks ideally tend to have a PEG ratio of less than 1.
The above two indicators are a few methods to identify stocks that are currently trading at less than their intrinsic value. In addition, Price/Book Value, Price/ Cash flow and other valuation multiples can also be looked upon to find undervalued stocks. ‘Buy low, sell high’ strategy is exercised by value investors. When the stock price goes past its intrinsic value, investors are in the money.
Let us put our lens through stocks which are trading near their 52-week low and have a lower P/E multiple in comparison to their peers.
- Royal Dutch Shell Plc (LON: RDSA)
The Price/Earnings multiple of Shell stood at 15, while the Oil & Gas industry had a Price/Earnings multiple of 43.3. Apparently, Shell shares seem to be undervalued. Due to the Covid-19 crisis and challenging macroeconomic conditions.
Shell reported a loss of $18.1 billion during the second quarter of 2020. The company distributed $1.2 billion in dividends for the second quarter of 2020. The rise in the number of coronavirus cases and lessened demand for oil & gas could impact the performance of the company in the near term.
However, the FTSE 100 listed petrochemical and energy company has been continuously investing in exploring green energy alternatives. The oil major has a well-diversified portfolio of assets and a resilient business model, which could help them overcome the unprecedented times.
- Saga Plc (LON: SAGA)
Saga provides products and services related to general insurance, personal finance, package, and cruise holidays for elderly people. The Price/Earnings multiple of Saga stood at 3.4, while the Insurance sector had a Price/Earnings multiple of 13.5.
Apparently, Saga shares seem to be undervalued. The Company is looking to strengthen its balance sheet and improve liquidity. The rising number of coronavirus cases might impact the earnings of the company in the short term. However, it plans to reduce leverage and preserve cash to reduce the impact of the covid-19 crisis in the near term.
- Pearson Plc (LON: PSON)
Pearson is an FTSE 100 listed Company that provides learning services through digital platforms. The Price/Earnings multiple of Pearson stood at 16.4, while the Media & Publishing sector had a Price/Earnings multiple of 88.20. In addition, company’s PEG ratio was less than 1. Apparently, Pearson shares seem to be undervalued. The Company has a robust balance sheet and strong liquidity position to navigate through an unprecedented crisis.
During the third quarter of 2020, the Company experienced a surge in online activity with support from learners. The performance from Global Online Learning remained strong, driven by a 41 per cent increase in enrolments in Virtual School and strong sales growth in OPM (Online Program Management). However, failure to adapt to new technologies can help the company lose out its competitive edge over others.
- Just Group Plc (LON: JUST)
FTSE 250 listed insurer, Just Group has a resilient balance sheet due to interest rate hedging. Despite a turbulent and difficult time in financial markets due to coronavirus pandemic, the company’s capital coverage ratio has risen to 145 per cent during the first half of 2020.
The Price/Earnings multiple of Just Group stood at 2.7, while the Insurance sector had a Price/Earnings multiple of 13.50. In addition, company’s PEG ratio was less than 1. Apparently, Just Group shares seem to be undervalued.
- Galliford Try Holdings Plc (LON: GFRD)
UK based construction company, Galliford Try Holdings Plc is a well-capitalised business. Majority of the company’s order book comprises of public sector projects. The company’s order book has grown year-on-year during 2020. Despite the challenges posed by the coronavirus pandemic, the company continues to do well with an order book of £3.2 billion and has secured 90 per cent of the anticipated revenue from the new financial year. However, Brexit poses a significant amount of threat to the supply chain of the company.
The Price/Earnings multiple of Galliford Try Holdings Group stood at 0.4, while the Engineering & Construction sector had a Price/Earnings multiple of 6.1. Apparently, Galliford Try Holdings Group shares seem to be undervalued.
These companies range from the energy sector, financial services, and media sector. These companies have delivered a resilient performance during an unprecedented crisis. Merely looking at relative valuation multiples to identify value stocks is not the complete solution. Deeper dive into the health of the company and its nature of business is of prime importance. Notably, value investing has helped a lot of investors with wealth creation over the years.