Bloomsbury Publishing (LSE: BMY), James Latham (LSE: LTHM) and Zetar (LSE: ZTR) have P/Es lower than the FTSE 100.
Let me start by saying FTSE 100 (UKX) index trackers can be great investments for many people. Such trackers can capture the performance of the benchmark index at low cost and give an easy opportunity to enjoy the potential future power of the stock market -- without the worry of individual stock-picking.
In fact, now does not look to be a bad time to back the market through an exchange-traded fund such as the HSBC FTSE 100 (LSE: HUKX). Standing at 5,676, the blue-chip index currently trades at a price-to-earnings (P/E) ratio of 10 -- a multiple that is well below the average of 15 seen since the start of 2000.
That said, there are always shares that look even better value than the FTSE 100 -- and I'm always scouring the market for low-P/E bargains that offer the chance of a 're-rating' and could beat a tracker by a healthy margin. Here are three names I believe should outperform over time:
1: Bloomsbury Publishing (115p/£85.3m mkt cap)
Bloomsbury Publishing (LSE: BMY) made its name on the back of the Harry Potter phenomenon. So the snapshot view is that the publisher has had its day now that JK Rowling has hung up the young wizard's wand.
But such lack of perceived growth opportunity means the company is valued at less than its net assets and has over 75p per share in net working capital. Factor in a current P/E of 9.44, which is expected to fall further next year, and the price seems to make little sense. The P/E falls to 8 against enterprise value (stripping out the cash). There's also a respectable dividend yield of around 4.8%.
Perhaps most importantly, Bloomsbury looks capable of steady growth from here, but this is certainly not reflected in the price. The company described 2011 as "transformational" as it acquired leading academic publisher for £19.2m from its cash reserves and shed a loss-making German subsidiary. It also saw a huge increase in e-book sales of 159% to £5.7m and has invested heavily in digitising its entire back catalogue, including young Mr Potter.
It has since acquired a smaller publisher in Switzerland as it moves further into the more predictable area of academic publishing. I see steady growth and fundamentally good value here.
2: James Latham (276p/£53.11m mkt cap)
It's a similar value with growth story at wood importer and distributor James Latham (LSE: LTHM) whose final results for the year to the end of March 2012 were very encouraging. Latham made earnings per share of 31.9p on improved sales. The company put in this performance despite additional costs incurred due to the relocation of its biggest depot to a larger, modern site in Leeds.
This year's anticipated earnings place the shares on a P/E of 9.9, falling further next year, while the expected yield of 3.6% is covered over three times by earnings.
These figures look too generous given the company's overall repositioning for growth and its track record in achieving that growth. Best of all, its net tangible assets of over 240p per share and respectable stake in the business by the founding Latham family are further reason for confidence.
3: Zetar (197.5p/£26.2m mkt cap)
The AIM-listed confectionery and snack foods group Zetar (LSE: ZTR) specialises in aligning its wares with major brands and character licensing.
Zetar has grown turnover steadily in recent years, though profits have remained largely flat. Nevertheless, brokers' expectations for this year place the shares on a P/E of just 5.7, which falls to 4.8 next year. There are also net tangible assets of 125p per share, and net borrowings of £10.8m.
Zetar paid a maiden dividend of 2.25p per share last year and has recently been pretty upbeat about its future prospects after a disappointing Easter.
If the company can do this well during the leanest of times, it deserves a higher rating. The shares look solidly defensive and are too cheap for a steadily run growing business in which the directors have a good stake.
What now?
Of course, there are never any guarantees with individual shares and selecting companies outside the FTSE 100 generally carry more risk than buying a standard tracker. However, I feel trawling the market, studying annual reports and assessing valuations can pinpoint potential index-trouncing winners.
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> David owns shares in James Latham and Zetar. He doesn't own shares in Bloomsbury Publishing.
