While the FTSE 100 may be within 5% of its all-time high, there are still a number of stocks trading at ‘dirt cheap’ prices. As such, it remains a relatively appealing time to allocate capital to the stock market, with bond yields being incredibly low and likely to rise when interest rates finally creep up, and property offering paltry yields and limited capital upside.
Challenging Sector
Of course, one reason why some stocks are cheap right now is a challenging operating environment. That’s the case for BAE (LSE: BA) (NASDAQOTH: BAESY.US), which has seen its top and bottom lines come under severe pressure in recent years due to austerity being en vogue across the developed world. In fact, things were so bad for BAE last year that it released a profit warning and, once the market had reacted (negatively) to that, its shares have soared – posting gains of 16% in the last year.
Despite this, they are still very, very cheap. BAE trades at a 20% discount to the FTSE 100’s price to earnings (P/E) ratio of 16 and, as such, could be the subject of an upward rerating over the medium to long term. Furthermore, BAE offers a yield of 4.2% at the present time despite paying out a rather modest 54% of profit as a dividend. This provides further evidence of the appealing value of BAE’s shares.
Disappointing Performance
While BAE released a profit warning last year, its net profit ended up being just 10% lower than on the previous year. This situation contrasts markedly with gold miner, Centamin (LSE: CEY), which saw its bottom line sink by 41% last year, and is due to see it tumble by another 36% in the current year. It may come as little surprise, then, that Centamin trades at a significant discount to its net asset value, with it having a price to book (P/B) ratio of 0.89. This indicates that its shares could move significantly higher – especially since its profitability is expected to improve next year.
Growth Potential
Meanwhile, support services company, Ashtead (LSE: AHT), looks cheap for a very different reason. It is expected to grow its earnings by 26% in the current financial year, followed by a rise of 16% next year. That’s a superb rate of growth and means that the company’s bottom line is set to be 46% higher in 2016 than it was in 2014.
As such, investor sentiment could be catalysed over the medium term – especially since Ashtead trades on a price to earnings growth (PEG) ratio of just 0.6. This indicates that it offers growth at a reasonable price, with its shares appearing to be worth buying alongside those of BAE and Centamin.