Global stock markets have been holding up well despite the continuing threats of inflation and recession. But much of the recent performance has been underpinned by a return to form for US mega caps – most of which fall into the ‘growth’ investing camp.
In this article, we look at three relatively unloved shares closer to home that are worthy of consideration for investors with a ‘value’ focus. But firstly, what is value investing?
What is value investing?
Value investors look for lowly-valued companies that have fallen on hard times and could hold potential for a recovery. They want to invest in companies they believe are ‘cheaper’. In other words, sitting at a lower share price than what is considered their true worth, but could get a bounce and undergo a turnaround.
Sometimes a company’s assets or profit potential isn’t fully reflected in its share price. This could be for a number of reasons. It might be that it’s not hit its targets, perhaps there’s been a change of management, or maybe there’s just a gloomy investor outlook for its part of the market.
This can help create opportunities for investors.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income they produce will rise and fall in value, so you could get back less than you invest. Ratios and figures shouldn’t be looked at in isolation.
Investing in individual companies isn't right for everyone because if that company fails, you could lose your whole investment. If you can’t afford this, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
ASOS – turnaround play
ASOS is a leading name in fast fashion and was one of the early pioneers of ecommerce. It’s been struggling of late, slipping into loss-making territory on the back of falling sales.
We think its middle-of-the-road offer is particularly vulnerable to challenging economic conditions. That’s reflected in sales-based valuation multiples at the bottom of its peer group.
But a recent fundraise gives management some breathing space to turn the ship around.
Management’s core focus for now is rebuilding profitability, and the recent third-quarter update showed good progress on this front. As part of this drive, it’s reducing investment in the US where progress has been disappointing. This could put a lid on the company’s future growth prospects.
However, there’s some comfort in the fact the fundraise attracted monies from strategic investors in the fashion industry, including the likes of Frasers.
We think that ASOS’ focus on fashion conscious twenty-somethings, as well as a stable of brands like Topshop and Miss Selfridge, could see it attract industry bidders. This could help give the valuation a boost, but there are no guarantees.
The key building blocks of an investment case should be based on sustainably strong financial performance, and these aren’t in place yet. But ASOS has a strong track record of bouncing back from crises and re-inventing itself. If it can do so again, investors could be rewarded.
So far, the strategy seems to be on the right track. But delivering a successful about-turn won’t be easy, and shareholders should be prepared for a bumpy ride.
VIEW THE LATEST ASOS SHARE PRICE AND HOW TO DEAL
Barclays – high street bank with a difference
Barclays bounced back from a disappointing 2022 with a solid set of first-quarter numbers. Despite this, year-to-date total investor returns from the shares have been underwhelming compared to the competition. And the group’s now valued at under five times forward earnings – bottom of its peer group.
As a UK bank with a differentiated investment case from other well-known high street names, Barclays has its attractions.
Its credit card business has been benefitting from today’s challenging economic conditions. Higher interest rates, particularly in the US, plus a 30% jump in balances, pushed income from the division up almost 50% in the first quarter.
The corporate and investment bank, Barclays’ largest division, could also benefit if tentative signs of a recovery in IPO activity become more of a trend.
Meanwhile, first-quarter weakness in capital markets and equity trading was partially offset by an uptick in areas like fixed income trading and corporate banking, reflecting the diversity of the model.
We’re comfortable with the strength of the balance sheet and the prospective 6.1% dividend yield doesn’t appear too ambitious. Of course, there are no guarantees and yields are variable and not a reliable indicator of future income. The shares could be worth a closer look, but the likely arrival of recessions in the UK and the US could still present some challenges.
VIEW THE LATEST BARCLAYS SHARE PRICE AND HOW TO DEAL
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British American Tobacco – bye bye buybacks, but for how long?
With tobacco consumption in decline for some time now, we think that cash returns to shareholders are the key attraction to investors in British American Tobacco (BATS).
With that said, it’s no surprise that the valuation took a tumble in the wake of management’s decision to pause the share buyback programme earlier this year.
But recently appointed CEO, Tadeu Marroco, has hinted that buybacks could be back on the agenda if certain debt reduction targets are achieved this year.
In the meantime, there are other ways to return cash to shareholders and the dividend yield is one of the highest in the FTSE 100. Based on recent guidance, we think the prospective yield of 9.7% looks sustainable for now. But of course, yields are variable and not a reliable indicator of future income.
Dividends vs share buybacks – what investors need to know
Keep in mind though that the sector’s not without controversy. There are a number of institutions that must exclude it from their stock-picking process as a result. This puts a glass ceiling on potential share price growth.
There’s also challenges in the company’s largest market, the US, as well as regulatory scrutiny of faster-growing products like vapes – both of which stand out as key risks moving forward. That’s reflected in a valuation that’s close to ten-year lows.
VIEW THE LATEST BRITISH AMERICAN TOBACCO SHARE PRICE AND HOW TO DEAL
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Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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