St Ives (LSE: SIV), Trinity Mirror (LSE: TNI) and ZincOx Resources (LSE: ZOX) 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 5,664, the blue-chip index currently trades at a price-to-earnings (P/E) ratio of 10.3 -- 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: St Ives (71p/£81.45m mkt cap)
These are tough times to be a printer, and St Ives (LSE: SIV) group is the UK's biggest. When the market was still feeling optimistic about the world in the autumn of 2007, St Ives' share price was above 290p. That didn't last, though, and the shares' slide has never really been reversed.
During that five years, St Ives' performance has been patchy, but not as bad as the share price would have us believe. Recently, the company has somewhat reinvented itself through acquisitions, and now provides "joined up marketing across a range of physical, digital and social media".
Its marketing services businesses offer some potential for growth, while print margins remain under pressure.
But this isn't a growth story for me as a potential investment. Instead, it's a matter of considering it for the maintenance of the prospective dividend. The brokers expect the dividend to be 5.5p, rising to 6.3p next year; a whopping 8.9%. This looks doable as the yield is well covered by earnings. The expectations for the current year place the shares on a P/E of 4.8 for this year, falling to 4.3 next year. The balance sheet looks reasonable with net debt of £9.6m, despite the investment of £10.5m in recent acquisitions; and NTAV of over £32m. St Ives also expects to complete the sale of its property in Crayford, for £3.3m soon, while there are three other surplus properties for sale with a combined value of around £4m.
2: Trinity Mirror (28p/£72.15m mkt cap)
Trinity Mirror (LSE: TNI) has to be just about the cheapest company on the market on prospective and historical P/E and price-to-cash-flow.
At 28p, brokers' expectations for the current year place the shares on a P/E of 1.2. In case you're wondering, the decimal point is in the right place! And this is the aggregate forecast of five brokers, with a very high degree of consensus.
The market seems to be making a snap judgment that there's no great future in the newspaper business. Trinity publishes five national newspapers, over 130 regionals and over 500 digital products for advertising, etc.
One of the best-known Foolish investors agrees with this basic cheapness of the shares. The problem, of course, is debt. Net debt of £221m makes the P/E more like 4.9 against enterprise value. But Trinity did manage to reduce its debt last year by almost £45m due to strong cash flow. At this rate, the company could be debt-free in four or five years allowing it to resume dividends. Also, the group's freehold property currently valued at £177m may be worth more in practice.
Again, this is no asset play. But if you believe Trinity's earnings can be maintained at anything like the current level, then the shares are inexplicably cheap.
3. ZincOx Resources (66p/£58m mkt cap)
The flipside of the above two situations where the market seems to be overly discounting what it perceives to be declining businesses is ZincOx Resources (LSE: ZOX) where there's unrecognised growth potential.
The company takes waste product from the steel industry free of charge, puts it through its Korean recycling plant, which yields a high quality zinc concentrate, then sells back the balance of material as a low-grade iron bearing product.
It's rare to find a jam-tomorrow stock on a lowly P/E rating -- and to be fair, ZincOx only makes it on consensus prospective earnings for 2013 of 7.14p -- which places the shares on a P/E of 9.2.
Nevertheless, I think this will come to pass as the company is doing everything right so far. But as a shareholder, I'm more optimistic about what earnings will be five years from now. ZincOx says its first plant (which cost $110m, or c.£71m) is working well and is in ramp-up mode. It plans another Korean plant of the same size and its operations are backed by 10-year supply agreements with the Korea Zinc company covering approximately 400,000 tonnes per annum.
Meanwhile, the company has £12m in cash following a fundraising in December to help fund its second plant in South Korea and to enable the technology to be rolled out in the USA, Turkey and Thailand as ZincOx aims to become the world's largest recycler of zinc. If all goes according to plan and the price of zinc holds up, the shares will be a lot more expensive than they are today in a year or two.
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 ZincOx Resources. He doesn't own shares in St. Ives or Trinity Mirror.
