With the FTSE 100 trading close to an all-time high, finding cheap stocks is becoming more difficult. Certainly, there are shares available which appear to trade at discounts to their intrinsic values. However, stocks which can be classed as ‘bargains’ are becoming few and far between. Despite this, here are two companies which seem to offer exceptionally wide margins of safety. Could now be the right time to buy them?
Low valuation
Reporting on Tuesday was palm oil and rubber producer Anglo-Eastern Plantations (LSE: AEP). It released a statement to coincide with its AGM. In the first five months of the year, the company’s own production of fresh fruit bunches (FFB) was 19% higher than in the same period of the prior year. FFB bought in was 105% higher when compared to the same period of the previous year, with the production of FFB and external crop purchases higher as the effects of drought and haze on the palm trees subsided.
The company’s new planting for the first part of the year was 809 hectares. New plantings remain behind schedule due to delays in finalising settlement of land compensation. The biogas plant in the Kalimantan mill has been completed. At the present time, the trapped biogas is flared while waiting for the final electrical works to be completed for the power generation.
Looking ahead, Anglo-Eastern Plantations is forecast to increase its earnings by 124% in the current financial year. This puts it on a forward price-to-earnings (P/E) ratio of just 5.5, which suggests that it trades on a wide margin of safety. Certainly, there is scope for its outlook to be downgraded. However, in the long run it could prove to be a worthwhile investment.
Growth potential
Also offering upside potential is fellow palm oil and rubber plantation operator MP Evans (LSE: MPE). Unlike Anglo-Eastern, it trades on a relatively high rating. For example, it has a P/E ratio of 27.4, which suggests that there may be limited upside ahead. After all, within the same sector it is possible to buy much lower-rated alternatives.
However, the P/E ratio does not take into account a company’s growth rate. In the case of MP Evans, it is forecast to report a rise in net profit of 52% in the current year, followed by additional growth of 26% next year. Both of these rates of growth are well ahead of the wider index. This could help to improve investor sentiment over the medium term.
Furthermore, when combined with the company’s P/E ratio, it puts the stock on a price-to-earnings growth (PEG) ratio of only 0.7. This suggests that there could be more upside ahead after the company’s 83% share price rise over the last year. Certainly, the production of any commodity can lead to high volatility and uncertainty in terms of the price received. But with a wide margin of safety, MP Evans seems to be a shrewd long-term investment.