Many investors feel more comfortable buying stocks that everyone else is buying than stocks that are out of favour. The trouble is, all business go through phases in which they thrive and in which they do less well.
A popular stock is generally a thriving business. And you’ll likely be paying a premium price that offers little margin of safety against a de-rating should it enter a phase when it does less well.
The reverse applies to out-of-favour stocks. The business will generally be going through a difficult time, and you’ll likely be buying at a cheap price. If the business is fundamentally sound, you should benefit from a re-rating when it thrives once again and becomes an increasingly popular stock.
Considerable upside
With this in mind, I’m looking today at two currently unloved FTSE 250 stocks: financial markets trading platform IG Group (LSE: IGG) and consumer goods firm PZ Cussons (LSE: PZC).
I believe both are fundamentally strong businesses that will return to growth and popularity in due course. As such, I see considerable upside for investors buying the shares at today’s prices.
Dogged by uncertainty
IG Group enables its clients to trade financial markets on leverage, through spread betting and contracts for difference (CFDs). Its shares were trading above 900p last August, but are currently changing hands at 578p.
Investor sentiment has been dogged by uncertainty around new UK/EU regulations that limit the amount of leverage firms like IG can offer to retail clients trading CFDs. However, I believe we now have sufficient clarity on the impact on IG to be able to say that the current share price is overly depressed.
Cheap P/E and high yield
City analysts are forecasting a 22% fall in earnings for the company’s financial year ending 31 May. This gives an undemanding price-to-earnings (P/E) ratio of 12. And with management and analysts confident of a return to growth thereafter, the P/E falls to 11.5 for fiscal 2020.
Furthermore, there’s a highly attractive running dividend yield of 7.5%, with the board having said in half-year results in January that it expects to maintain the payout at the current level until earnings allow it to resume increases. Due to the cheap P/E and high yield, IG is a top turnaround buy in my book
Challenging conditions
Personal and home care group PZ Cussons, whose roots go back to the establishment of a trading post in Sierra Leone in 1884, has been in the doldrums for a good few years now. The group has geographical diversification, but has faced very challenging economic conditions in its significant Nigeria market, ever since the oil price crashed in 2014.
Its shares reached a high of over 400p in 2013, and were above 300p little more than a year ago. But are currently trading at under 200p.
Emerging markets outlook
City analysts are forecasting a 9% fall in earnings for the company’s financial year ending 31 May. This gives a P/E of 16.2, which is cheap relative to its peers in personal and home care. Furthermore, with analysts expecting a return to growth in fiscal 2020, it comes down to 14.9.
A 4.2% yield on a maintained dividend doesn’t match IG’s, but is plenty decent enough. And as I believe the longer-term economic outlook for Nigeria and other emerging markets is good, I see Cussons’ depressed share price as a great buying opportunity.