Value investors seek companies with strong fundamentals that are underappreciated by the market. While finding such opportunities is hard, as stocks trade at a steep discount due to a reason, we look for established companies that have considerable potential to command a premium by focussing on a niche market.
Primary criteria used to find the company discussed below were a strong balance sheet, a price-to-earnings ratio below 10 and a market capitalisation of more than US$1 billion. Whether it can deliver impressive capital returns remains to be seen, historically, though, investing in undervalued stocks has generated higher returns for UK-investors, compared to chasing the rising prices of popular growth names.
Bellway plc (LON:BWY)
The Newcastle-based homebulder has had a strong run after reporting stellar financial results for the half-year ended Jan. 31. Looking at the price action — up 24% over the past year and more than 250% in five years — it hardly appears to be a stock that’s ignored by market despite strong fundamentals.
When the high growth phase driven by multi-year housing boom in the UK started losing steam, the government’s multiple initiatives to alleviate the housing problem, such as Help to Buy subsidy scheme, has opened a new growth avenue for Bellway.
On the back of strong expected demand for low cost housing, Bellway is investing heavily in development to sustain current operating margins through economies of scale after average selling prices realised in the most recent half-year showed a weakness.
Despite shares trading near all-time highs, Bellway’s price-to-earnings ratio of 8.3 hardly makes it expensive, more so because it currently pays a 3.9% yield with analysts expecting a three-year EPS growth of nearly 24%.
Find the full-list of companies meeting these fundamental criteria: UK Value Play