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2 ‘hidden’ bargain shares for long-term investors

Image: Sainsbury's: Fair use

The idea that there are bargain shares still available to investors may sound somewhat hard to believe — after all, the FTSE 100 reached a record high in the last few weeks. However, there are still stocks and sectors that appear to be grossly undervalued, given their outlooks.

Now could be a good time to buy them, ahead of what may prove to be an increasingly prosperous period. Here are two prime examples of stocks which appear to fit neatly into that category.

Improving performance

Reporting on Monday was speciality bakery manufacturer Finsbury Food Group (LSE: FIF). Although its revenue flat-lined in the first half of 2016 when compared to the same period of the prior year, its operating profit increased by 4%. This was due to a rise in operating margin of 20 basis points, which boosted pre-tax profit by 5.3% to £7.9m. This allowed it to raise dividends by 7.5% to 1p per share, while net debt of £21m equates to 0.8 times the annualised EBITDA (earnings before interest, tax, depreciation and amortisation) of the company. This shows that it remains financially sound.

Despite a tough operating environment, Finsbury Food has been able to drive through its planned investment programme. This has created a more diversified, multi-channel retailer that appears to be better placed to overcome the challenges in the wider food industry and economy. Its shares currently trade on a price-to-earnings (P/E) ratio of 11.3. Given its forecast rise in earnings of 5% in 2017 and 3% in 2018, this indicates that it offers upward re-rating potential. That’s especially the case since further innovation and investment may be on the horizon.

Certainly, Brexit poses an uncertainty for the company. It could lead to reduced sales and a lack of near-term growth. However, with a strong financial platform and a low valuation, Finsbury Food could be a sound long term buy.

A changing business

Likewise, Sainsbury’s (LSE: SBRY) appears to me to be a worthwhile investment for the long run. Its combination with Argos has thus far been a great success, with the latter posting like-for-like sales growth in excess of 4% in its most recent update. This helped to pull up a rather lacklustre performance from Sainsbury’s in what remains a challenging market.

Of course, the Argos acquisition is only one part of Sainsbury’s outlook. It is also seeking to remain ahead of the competition based on its pricing structure. In recent years it has been ahead of sector peers when it comes to pricing. Sainsbury’s was the first major supermarket to offer a comprehensive ‘price match’ service, while it also led the way in returning to a simpler pricing structure. This ability to connect with changing customer tastes and demands should serve the company well in future and provide the business with a competitive advantage.

With Sainsbury’s trading on a P/E ratio of 13.5, it seems to offer excellent value for money. Clearly, market conditions could worsen and lead to lower profitability. However, with a sound strategy and a margin of safety, now could be the right time to buy it for the long run.

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Peter Stephens owns shares of Sainsbury (J). 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.