Value investing delivered poor returns last year. Cheap stocks stayed cheap and sometimes fell even further. But one year of underperformance isnt necessarily a reason to abandon a strategy that has been proven to work over many decades.
In todays article Id like to look at two stocks thatI believe offer good value in the current market, with limited downside.
Aviva
Aviva (LSE: AV) shares have fallen by 18% from the 52-week high of 578p seen in March last year. Over the same period, earnings per share forecasts for 2015 have only fallen by 8%. This suggests to me that Avivas share price may have fallen too far.
Avivas underlying trading has remained healthy and the company is making good progress with its turnaround plan. The acquisition of Friends Life Group surprised the market but it appears to be working well, by generating cost savings that should help improve Avivas cash generation.
In its third-quarter update Aviva reported a 13% rise in the value of new insurance business written in the UK. This figure excluded Friends Life, which took the total to 36%. In Europe, the value of new business rose by 11%, while in Asia it was 21% higher. These seem like attractive figures to me.
Avivas valuation is attractive too. The insurer currently trades on 1.2 times net asset value and on a 2016 forecast P/E of 9.4. The shares offer a prospective yield of 4.9%.
This is significantly higher than the FTSE 100 average of 4.1%, and compares well to Avivas peers Prudential and RSA Insurance. Both of these firms offer forecast yields of around 3.3% and trade on double-digit forecast P/E ratios, despite having lower forecast earnings growth for 2016 than Aviva.
I believe Aviva could be an attractive long-term income buy at the current price.
Barclays
If Aviva has underperformed, Barclays (LSE: BARC) has been an outright disappointment. The banks shares are worth a whopping 37% less than they were six months ago.
As a shareholder, Im not entirely sure why. Although forecast earnings per share for 2015 have fallen by 9% since July last year, Im not convinced this explains the slump in the share price.
Interestingly, City analysts seem to agree. Seventeen of the 24analysts whose recommendations are covered by Reuters rate Barclays as a Buy or a Strong Buy.
50% upside?
Barclays shares have a tangible book value of 289p per share. Thats 50% more than the current share price of around 180p. If Barclays continues to trade in line with expectations, Id expect this discount to gradually close.
Barclays earnings per share are forecast to rise by 17% to 25.4p in 2016, putting the stock on a 2016 forecast P/E of only 7.3. The banks 2015 earnings are also reassuring. We already know Barclays earnings for nine of the last 12months. Based on these figures, analysts expect Barclays to report earnings per share of 21.7p for 2015 as a whole. Thats equivalent to a P/E of 8.6.
Finally, Barclays dividend is also expected to rise this year. A chunky 23% increase to 8.2p per share is expected, giving a forecast yield of 4.4%.
Roland Head owns shares of Barclays and Aviva. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.