Part of knowing what shares to buy is being able to tell the difference between undervalued bargains and shares that are justifiably in a slump. On that score, here are three I’ve been taking at look at:
Insurance bargain?
RSA Insurance (LSE: RSA) has a long history of rewarding shareholders, although the recession fallout finally took its toll and the company had to curtail its dividend. It did manage 2p per share in 2014, though, and forecasts suggest as much as 10.7p this year for a yield of 2.6% — that’s still modest, but a rise to 3.7% is on the cards for 2016 and it would be very safely covered.
By Q1 time, RSA was able to tell us that 2015 had started positively, with premium income turning upwards again — albeit by only 1%, but it really does look like the bottom is passed. The shares have slumped by 16% over the past year to 399p, giving us forward P/E ratings of 13.6 and 12.2 for this year and next.
Added to that, in Stephen Hester I reckon the company has one of the best FTSE 100 CEOs there is — and RSA is surely worth a closer look.
Cheap electricals?
I feel a good bit less positive towards AO World (LSE: AO), whose shares have suffered a 44% crunch over 12 months, to 145p. The problem is that we have no real idea how to value AO shares right now, as there was a loss this year and we’re only looking at a very small profit penciled in for March 2016 — giving us a meaningless P/E of 186.
The first significant profit is expected in 2017, but we’d still be looking at a P/E of around 38 on that, with no likelihood of dividends for some time to come. AO might turn into a great growth story, but we’d need EPS to more than double again by 2018 to get the P/E down to the FTSE average — and from now until then is a very long time in the world of electrical goods retail.
A sweet delight?
My third for today is Tate & Lyle (LSE: TATE), the sugar giant that’s perhaps best known these days for a string of profit warnings and falling earnings — EPS crashed by 33% in 2014, though the dividend was held at a 4.7% yield. There’s 5.2% on the cards for March 2016, now that the shares have lost 23% in a year, but it would not be well-covered and has to be at risk.
The firm’s restructuring to focus on its key speciality ingredients business is looking like a good move, and Tate & Lyle could well become a good investment again — but I think I’d like to see another year of recovery before I’d commit myself.
