Trying to find attractive value stocks in today’s market is difficult. Most companies are overvalued and those that are not too expensive tend to be nothing but junk. However, I believe I have found two stocks that are both of a high quality and still appear to be cheap.
Deep discount to book value
Livermore Investment Group (LSE: LIV) is my first pick. It flies under the radar of most investors, even though its market capitalisation is £95m. The company may appear difficult to understand because it is an investment business that invests in property, debt, and equity. Therefore traditional valuation analysis is not appropriate. Instead, the best way of valuing Livermore is to consider the company’s growth net asset value, as well as cash returns to investors.
At the end of 2016, it reported a net asset value of $0.9 per share, around 71p at current exchange rates. Year-on-year net asset value grew by 16.8%, and the figure above excludes a $15m dividend to investors as well as an $8m share buyback. Including these two cash distributions, adjusted shareholder funds at the end of 2016 would be $180m, up 21% year-on-year.
Two things stand out about the above numbers. First off, shares in Livermore are currently trading at a 27% discount to book value, which is a highly attractive margin of safety. Secondly, management is returning a healthy amount of cash to investors and buying back stock at a discount to net asset value, which is extremely impressive as such a strategy creates an enormous amount of value for investors. By purchasing shares at a 27% discount to book, management is spending 73p to buy £1. Who would pass up such an attractive offer?
The one downside to Livermore is that, as an investment company, the firm’s returns are lumpy and not guaranteed. Still, with management set on creating value, investors can take comfort in the fact that over the long term, it will produce positive returns. Over the past year, shares in the company have returned 108%.
Growth and value
Just Group (LSE: JUST), formerly JRP Group looks to be another unloved value play. It is a financial services business, offering products for the retirement market. Thanks to the shakeup of the UK retirement market in recent years, the company has fallen out of favour with the City and investors, but management has managed to stabilise the business, and now earnings per share of 13.4p are pencilled-in for 2017. Earnings growth of 20% is expected for 2018, taking earnings per share to 16.1p and putting the company on a forward P/E of 7.3.
Even though concerns remain about the viability of the company’s business model in the rapidly changing retirement product market, Just’s low valuation coupled with expected growth in the years ahead, lead me to conclude that the firm is not on the rocks just yet. The low valuation more than makes up for any troubles that might be ahead. Shares in the company currently support a dividend yield of 2.9%.