The three firms featured in this article are not obvious value buys, but I believe that at least two of these stocks offer the potential for big profits at todays prices.
Enterprise Inns
Pub chain Enterprise Inns (LSE: ETI) came close to going bust during the financial crisis, thanks to net debt which peaked at well over 3bn. Enterprises net debt is now down to 2.3bn and the firms shares trade on a forecast P/E of just 5.4. Is there hidden value here?
Possibly.
The groups property assets are valued at 3.7bn. Yet the total value of Enterprises equity and its net debt it just 2.8bn. In theory, this means that a trade buyer could buy the entire Enterprise business for 24% less than the value of its property assets.
However, while net debt is falling, so is the value of Enterprises property portfolio. For Enterprise shares to deliver on their hidden value potential, net debt needs to fall faster than the value of the groups property portfolio.
In other words, Enterprises loan-to-value ratio needs to improve. So far, its fallen from 66% in 2010 to 62.7% in 2015. Its a promising start, but progress may be slow.
Tesco
Another firm with a big property portfolio and a large pile of debt is Tesco (LSE: TSCO).
The recent sale of Tescos Korean business means that Tescos net debt and the value of its property portfolio have fallen since the firms half-year results.
My calculations suggest that Tescos net fixed assets, which include property along with other long-term assets such as investments, may now be worth about 21bn. I estimate that the firms net debt may now be around 7bn.
As with Enterprise, we can look for hidden value by comparing the value of Tescos fixed assets with its enterprise value (market cap plus net debt). I estimate that Tescos enterprise value is currently about 21bn, equivalent to the value of its net fixed assets.
This means that unlike with Enterprise, there is no obvious hidden value in Tescos portfolio of property and investments.
With a 2016/17 forecast P/E of 19, Tesco stock doesnt look cheap against forecast earnings, either. However, I dont see any obvious reasons for the shares to fall further, so now could be a good time to start thinking about a recovery buy.
Nanoco Group
Nanotechnology small-cap Nanoco Group (LSE: NANO) is not an obvious value buy. The firm makes quantum dots and nanoparticles for use in technology such as LED displays and solar panels, but has yet to make a profit.
However, Nanoco has net cash of 24m and moved from AIM to the LSE Main Market earlier this year. The group also has some high-powered institutional investors, including Henderson Global Investors (17%) and Baillie Gifford (14%).
After years of waiting, there is now a big potential catalyst for share price growth. Commercial production of Nanoco technology by the groups licensing partner, Dow Chemicals, is expected to start during the first half of 2016
Analysts forecasts suggest Nanoco could report earnings per share of 3.08p in 2016/17. That puts the shares on a forecast P/E of 16 not expensive for a high-tech growth business.
Nanoco shares are down by 65% so far this year. Although this remains very speculative, now could be a smart time to buy.
However, I believe it is essential to diversify your portfolio when investing in high-risk stocks such as Nanoco.
One option I’d consider is a fast-growing pharmaceutical play that’s already profitable. The Motley Fool’s analysts chose this company for their latest report, “1 Top Small-Cap Stock From the Motley Fool“.
The Fool’s experts believe shares in this firm, which is targeting a 4bn global market, could be seriously undervalued.
The good news is that this report is completely FREE and without obligation.
To receive your report today, simply click here.
Roland Head owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.