When a whole sector is out of favour, there can be some bargains to be had amongst the wreckage. Getting the timing right can be hard, but I’ve never been one for trying to pick a bottom, and as long as you’re after long-term rewards you can do well. Here are three battered stocks that I think are oversold and undervalued now:
Rolls-Royce
Rolls-Royce (LSE: RR) has shocked seasoned investors with a string of profit warnings over the past 12 months, and the result has been a 38% crash in the share price since the end of 2013 — you’d have been paying more than £12 a share back the, but today you can get the same thing for 720p. Low oil prices aren’t helping, but that’s hitting hard across the economy and it’s the good companies being unfairly marked down that are the bargains.
For me, Rolls-Royce definitely looks like one of them — in its most recent guidance downgrade, the company told us that “Notwithstanding these expected headwinds we continue to believe that the group can achieve significant improvements to returns and cash flow, albeit later than previously indicated“.
Even with a couple of years of falling EPS, we’re still looking at a stock on a P/E of around 15-16, offering well-covered dividend yields of about 3%. But on top of that, Rolls-Royce is up there with the best in its class in its businesses — and in 10 years, I reckon we’ll be looking back on a golden opportunity.
Cobham
In Cobham (LSE: COB) I’m seeing a quality defence engineer that’s simply suffering from the downturn in worldwide demand. And the share price fall has actually only been recent — it’s only since the end of February this year that the price has been falling, shedding 23% to today’s 251p.
Although there’s been a squeeze on margins and Cobham’s statutory results for 2014 looked bad, with a 75% fall in reported EPS, the firm’s underlying figures looked a lot less worrying — underlying EPS down only 14%, with order intake up 14%.
Economies are strengthening and defence spending us starting to pick up, and I reckon 2014 will prove to have been the nadir for Cobham. Forecasts suggest two years of earnings growth, and put the shares on a P/E of under 12 with dividends of around 4.5%.
Weir Group
My final pick is pumping specialist Weir Group (LSE: WEIR), which supplies the mining, oil and gas and power markets — markets that themselves are under the cosh. But if you think they’re going to recover, which they surely will, then a picks and shovels firm like Weir could be a good one to go for.
Forecasts for 2015 earnings have been slashed by the City, with a 33% fall in EPS now expected for the year — a year ago they were predicting a 10% rise. But Weir has already been cutting costs to help it through the tough patch, and its dividends have always been conservative and very well covered. On today’s price we can expect a yield of around 3% this year, which is fine, and a 12% EPS recovery penciled in for 2016 would drop the P/E to 14.
Overall, I reckon all three of these companies are poised to come out ahead of their rivals when oil prices pick up and manufacturing demand starts to recover.
