When I look at the stock market at the moment, I note both overvalued and undervalued companies. I’m happy to pass on the option of buying stocks that I think are overpriced right now. However, undervalued firms can represent a good bargain that could offer me long-term rewards. Here are three of my current favourites.
Finding value with fallen angels
One of my filters for finding a stock market bargain is to identify companies that have slumped over the past year. A share price decline of greater than 10% is a good starting point.
Incredibly, the worst-performing FTSE 100 stock over the past year is Royal Mail, down 51%. It experienced reputational damage last year due to delivery problems based on staff shortages. Ofcom is now investigating the poor delivery rates. There’s also concern around issues with unions seeking higher worker pay.
However, do I really believe this warrants the share price halving? Not really. Profit before tax for 2021 was a healthy £662m, down slightly from the bumper 2020 figure of £726m. Yet it was much better than any of the three preceding years. This shows to me that the business has maintained some of the momentum from the pandemic and should continue to do so this year.
A rebranded stalwart
Another stock market bargain that I want to buy is Abrdn. Apart from my disdain for the name change from Standard Life Aberdeen, I feel there’s a lot to like about the company.
The rebrand last year was part of the transformation that was hoped to turn around the ailing financial services company. The share price is down 33% over the past year, but recent 2021 annual results showed an increase in both revenue and profits.
I see this as a stock that could be a good long-term value buy. In the meantime, I can also benefit from the juicy 7.83% dividend yield. So with a £100 investment, I’d be picking up almost £8 in passive income.
Another stock market gem
A final avenue way I can find value in the stock market is by considering the price-to-earnings (P/E) ratio. It might be the case that even though a share price hasn’t fallen much, it still trades at a low multiple relative to current earnings.
For example, ITV currently has a P/E ratio of 7.51. This is considerably below the stock market average in the FTSE 100.
ITV Studios should be able to post a rebound in revenues this year, given that production shouldn’t be hindered by pandemic restrictions. The streaming facility with BritBox should also be able to grow as more users sign up to catch up on popular shows including Love Island and Britain’s Got Talent.
The key element here is whether companies will be happy to spend big on advertising. The uncertain economic outlook might cause some businesses to cut marketing spend later this year.
All three stock market bargains are on my shopping list for £100 each. I’d like to buy all gems over the course of the next few weeks.