Thanks to our all-too-human aversion to embracing uncertainty, its easy to miss out onsome of the markets best opportunities. As we all should know,the best time to buy a company is often whennobody else will.
Given this, here are two companies trading on temptingly low valuations that I thinkwarrant closer inspection.
Quality going cheap?
The share price of spread-betting providerCMC Markets (LSE: CMCX) has been on a downward trajectory ever since the company issued a profit warning in September. After peaking at 290p in July, shares now changehands for just under 184p. Thats a drop of over 36%.
Why have investors turned their backs on the company? Well, despite the momentous referendum result, it turns out thatmarkets were less volatile than expected overthe summer. And when markets are quiet, there are less opportunities for spread-betters to make money.
The true extent of CMCs woes was revealed in last months set of interim results.Net operating income fell by4% to 75.5m with revenue per active client down 13% to 1,488. Despite seeing 8% growth in active clients during the first half of the financial year, underlying profit before tax sank 28% to just 18.8m (from 26.2m over the same period in 2015). With figures as depressing as these, its unsurprising that some investors voted with their feet.
Will the527m capbounce back? I wouldnt bet against it, particularly as 2017 could be an interesting year for the markets. With Donald Trump getting the keys to the White House in January, the French presidential elections in April and Brexit-related confusion likely to continue, investors could be in for a bumpy ride just the sort of conditionscompanies like CMCcrave.
True, theres a lot of competition out there, most notably from CMCs larger peer, IG Group. Nevertheless, the latter trades on a forecast price-to-earnings (P/E) ratio of almost 17. Contrast thiswith CMCs far-more-reasonable forecast P/E of just under 12.
There are other things to like about CMC apart from the price. Looking under the bonnet reveals a company achieving consistently high levels of return on capital invested and excellent operating margins. Its net cash position is another positive. Even those who invest for income may be tempted by the easily covered 4.5% yield pencilled-in for next year.
Overdone concerns?
Another company whose shares look cheap is Howden Joinery (LSE: HWDN) the hugelysuccessful 2.3bn cap kitchen supplier. Our forthcomingdeparture from the EU may haveknocked investor confidence in this stock but Im left wondering if with a P/E of 13 these concerns are overdone. After all,this is a business that hasgeneratedexceptionally high levels of return on capital for some time (an annual average of 44% from 2010 to 2015) despite severaleconomic wobbles playing outin the background.
It gets better. Although profits are forecast to stagnate for a while and a further drop in the share price cant be ruled out, next years3% yield looks very safe. The companys finances look incredibly healthy, with 182m of cash on its books.Operating margins are also very decent.
If Brexit isnt the nightmare every man, his dog and his dogs dog expect it to be, I fully expect sentiment to return to companies such as Howden, even if its admittedly cyclical nature makes it a more riskier option than CMC.
Eager for more?
So long as you’re prepared to go against the crowd, buying quality stocks on recent (but possibly temporary) price weakness can be an excellent way of growing your wealth over time.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
