Renowned fund manager Neil Woodford has been thrashing the market for a quarter of a century. Woodford is a very selective stockpicker. Hence, I always keep an eye on his holdings for promising investment ideas.
The following three firms are all currently on forward price-to-earnings (P/E) ratios of less than 12, compared with the FTSE 100 long-term average of 14:
| Company | Recent share price | P/E |
| BAE Systems (LSE: BA) | 460p | 11.9 |
| Royal Mail (LSE: RMG) | 418p | 11.8 |
| Game Digital (LSE: GMD) | 277p | 11.3 |
 BAE Systems
Woodford has recently been adding to his stake in BAE Systems, after exiting his position in HSBC due to concerns about what he called “fine inflation” in the banking industry.
BAE Systems is one of a number of stocks Woodford currently sees as “significantly below fair value”. And on a P/E of 11.9 it’s hard to disagree with his view.
Sure, the defence group is currently suffering from constrained spending in its traditional UK and US markets — earnings are expected to fall about 10% this year — but Woodford has his eye on the big picture. Defence spending is only going to rise in the longer term.
Royal Mail
Woodford didn’t buy into Royal Mail’s flotation on the stock market last year. The flotation came in the period between announcing his departure from asset manager Invesco Perpetual and the launch of his new CF Woodford Equity Income fund.
However, he’s now built a stake in the postal services group, which he describes as “fundamentally a very attractive, cash generative business”. Should such a business be trading at a higher P/E than the current 11.8? Woodford clearly thinks so.
Royal Mail had mixed news for shareholders at the company’s AGM in July: letters were better than expected, parcels weaker, but overall the chief executive said she anticipates the group meeting full-year expectations.
Game Digital
Computer games retailer Game Digital, successor to the chain that collapsed into administration two years ago, returned to the stock market in June. The much-changed business is the leading games retailer in the UK and Spain.
Woodford has backed the revamped group. And it says something that Game Digital is the only retailer, apart from fashion giant NEXT, that he holds within his fund. A P/E of 11.3 doesn’t look too demanding for a market leader in its sector.
Game Digital told us in a trading update last month that everything’s on track, and earlier this week announced a strengthening of its position is Spain with an agreement in principal to take over a portfolio of stores from US group GameStop Corp. which is exiting the Spanish market.