Finding long term value: Out of favour sectors/companies

Hi all,

At a time in which the S&P has a very high Price to Earnings (P/E) ratio, a quick Google search is indicating over 35 (Eg. S&P 500 PE Ratio & P/E & Yields).

I have been doing some reading and thinking how maybe it is time to look for long term value in undervalued out of favour sectors.

I mainly wanted to start this as a discussion on sectors that are out of favour and hence undervalued, but not necessarily in deep trouble. For example, I think that airline stocks and oil explorers are out of favour, but they are also heavily in debt and expected to have low demand for the next few years. That is not quite what I wanted to discuss, I am more interested in starting a discussion on out of favour sectors or companies in which the fundamentals have not really deteriorated that much over the last couple of years, yet the share price has fallen significantly during the period. The examples that have come to my mind after discussions with other investors are: Sectors such as gas pipelines, banks and telecommunications and in terms of countries maybe Russia, although I think there may be good options in Europe.

To give some broad indications, I am looking to discuss sectors, countries or companies with decent fundamentals and acceptable outlooks but low share prices, which could be something along the lines of or example, P/E ratios of under 10 in a normal year (Covid may have slashed the profit due to tightening margins from additional costs, but also depressed the share price), low Earned Value to EBITDA (or EBIT) lets say maybe under 8 or simply a company with valuable assets and no debt, which indicates potential for take overs or selling assets.

If you have a good idea, even if it does not quite fit my suggestions, feel free to mention it. Also, feel free to comment on the sectors I mention and discuss those if you want to :slight_smile: .

The more obscure and under-reported the sector or company the better.

I hope that this can lead to some kind of constructive discussion or even “brainstorming”. Collectively we might find some undervalued and good long term value opportunities among the out of favour sectors/companies/markets/countries :smiley:.

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Pretty much everything in the FSTE 250 then?

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As an explanation to the above, my reasoning for the sectors mentioned is the following:

  • Gas pipelines as the price and demand for gas has remained relatively stable, unlike oil

  • Banks as the reduced profits or even losses of 2020 appear to be mainly accounting ones as well as the impact of reduced interest rates. They still have not been impacted by the Covid damage to the economy, which seems to be at least partially “priced in”. It might just be my limited understanding, let me know if you think I am wrong and explain why.

  • Telecommunications, their revenues have stayed relatively stable compared to most companies, yet their share prices have been hit significantly.

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It could be :slight_smile: , but there is also quite a few retail and hospitality stocks which are likely to have very high debt as they closed for months this year.
That may also be the case for oil stocks, cruise companies, cinemas, city/market related companies due to Brexit, airlines, bus/rail companies as people work from home or use their car, TV companies that are probably going to see falling advertising revenues, etc.

I’ve just read the weekend read where they mentioned the same subject and I think its a good idea. My suggestion is a company like Compass (£CPG). The SP has been down since Covid and has been falling again due to the new restrictions.
This is a cleaning and catering company that is basically waiting for offices and similar spaces to re-open again. It seems like they do school dinners too, so the reopening of schools would be helpful to their bottom line.
I bought this stock as part of my dividend portfolio so look forward to that being restarted as well as the SP being at what i believe is a good discount.

Please not that this is not investment advice but just simply my inexperienced point of view. :slightly_smiling_face:

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My very risky suggestion would be travel. I personally jumped into carnival when their SP fell off a cliff (lime verything else did) in March. Massive risk, but if they survive and make it out of covid, then I think they’ll boom again. I believe they’ve took the opportunity to ditch some of their under-performing assest aswell. Reports that 85% of cruise customers book again. That’s the sort of client base anyone would want. And I’m sure everyone is itching to get away!

I’ve also looked into the industrial companies that provided these assets, like Boeing.
Huge issues with the 737 max which is now being rolled out again. SP crashed because travel companies stopped operating and postponed plane purchases. Theyll eventually pick up again as travel is allowed. But then everyone forgets about the other side to Boeing, such as all the military Contracts to build jets. They have contracts with nasa and another undisclosed space company.

I like to think they might be examples of what Buffet was talking about when he said “try and buy $1 for 66c”

I may be well off!! I’ve only been investing for a little over a year so this is absolutely not advice😅

Edit: This is exactly the sort of topic I like on this forum!

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Good post and discussion so far!

The one I’m doing a bit of research on (yet to invest) is:

Bakkavor Group (BAKK)

-The company is focused on manufacturing fresh prepared foods in the United States and China.
-Supplies to most supermarkets
-In China (a growing market for them) they supply to western establishments including Starbucks, KFC and Pizza Hut

For

-Profitable
-Revenue increase YOY barring this year which is down by 5%
-SP down by quite a bit due to COVID and is yet to recover back to to its previous levels
-Analysts consensus are Hold(8), Buy(1), Strong buy(1)

Bear case

-High debt - one to watch out for

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Maybe this isn’t quite in the spirit of the thread but why not just invest in the value risk factor directly with an ETF?

IWFV
https://www.ishares.com/uk/individual/en/products/270048/ishares-msci-world-value-factor-ucits-etf

This tracks the MSCI World Enhanced Value index (which includes companies at good value relative to their sector)
https://www.msci.com/documents/10199/174e3915-2087-4c5b-815b-c1b7ea1ccbbf

There’s also the vanilla MSCI World Value index but I don’t think there are any ETFs which track this on Freetrade :frowning:
https://www.msci.com/documents/10199/25465a5a-d52c-4bec-b5ed-a7b56eca8e0d

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Don’t IWFV & IWVG both follow that index?

Hi Cameron.
I actually hold some small positions in Small Cap Value ETFs (SPDR MSCI Europe Small Cap Value and the USA counterpart) which I was thinking of building up as part of my growing passive ETF positions, with the aim of “setting and forgetting” part of my portfolio.:smiley:

Nonetheless, I feel like in the current market conditions we may be able to identify good undervalued companies or sectors, potentially even “boring” compared to the hot renewable and technology stocks, but that may offer large returns in the long run and that is what I mainly wanted to discuss :slight_smile: .

Individual stocks are obviously higher risk, higher reward, but I feel like there have to be some obscure, undervalued, boring companies out there, that the market does not currently appreciate but that may have strong balance sheet positions or large profits compared to their price and that as such will naturally appreciate over the coming years.

They both follow the Enhanced Value index (which looks for good value within a sector, rather than just good value overall)

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Same.

Ha ha, trust @Cameron to recommend some ETF’s!

Edit:

This is what I would be concerned about with the cruise companies and some airlines. I recently trimmed my holding in Cineworld because of this. Even if they return to normal after Covid, they have a high amount of debt so are still a risky investment.

Good thread.

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Haha glad I have a rep for being the most boring person in the room. Obviously cool that people are looking for individual stocks, but just thought I’d make sure people realise you don’t need to pick stocks to access value. Anyway I’ll leave it there so as not to derail the actual stock discussions.

Edit: Just seen that PensionCraft coincidentally did a video on this exact topic today:

This also has has some more info directly relevant to OP @ 15:14 Ramin looks at the percentage of time where a country’s stocks have been cheaper (in terms of CAPE) than they are now:

Singapore, Poland, Japan, Turkey have only been cheaper than they are now <20% of the time

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If you’re looking for out of favour countries/sectors, I would argue that companies listed in the UK fit the bill. Stocks in companies of equal quality as compared to their overseas counterparts are trading at cheaper valuations here in the UK. Examples include Unilever vs Procter & Gamble. Shell vs Exxon Mobil. RB vs Clorox. BP vs Chevron. BAT vs Phillip Morris. Diageo vs Brown Forman. Burberry Vs Any other listed high quality fashion house. The list could go on and on…

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:slightly_smiling_face: I wouldn’t say boring. Maybe safe? And I also think there is room for ETF’s if they offer long term value.

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