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2 value stocks with a P/E below 8

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Brexit has thrown up some incredible bargains in the small-cap market. While the plunging pound has sent the FTSE 100 to yearly highs, small-cap domestic-focused equities have suffered. In some cases, the sell-off of domestic equities has been so aggressive and relentless that groups of small-caps are now trading at mid-single-digit P/Es with high-single-digit dividend yields.  

It’s not clear why investors have dumped these equities at such a rapid rate. Yes, there’s some concern about what will happen to the UK economy when the dust settles after Brexit. But a mid-single digit P/E suggests that the market believes these companies’ earnings will fall by 50% or more, which seems excessive in many cases. 

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Telford Homes (LSE: TEF) and Utilitywise (LSE: UTW) are two such post-Brexit bargains. 

Housing crash?

Year-to-date shares in Telford are down by 27.3%. It appears that analysts and investors worried about the company’s exposure to the UK’s housing market, specifically in London where Telford has a significant presence. However, Telford’s management doesn’t appear to be worried about the state of the market, and when analysing the firm the figures speak for themselves. Indeed, Telford’s forward sales stand at £640m, which is 50% of the company’s expected revenues over the next three years. 

With revenues for the next three years locked up, Telford at least deserves to trade at a market average multiple, but this isn’t the case. 

Shares in the company currently trade at a forward P/E of 8.2, falling to 6.2 next year and support a dividend yield of 5.3%. The group’s net asset value per share was just under 250p at the end of March, so after recent declines, the shares are trading at a price-to-book value of 1.2. 

A defensive sector 

The utility sector is considered one of the market’s most defensive. Unfortunately, it looks as if the market believes provider Utilitywise can’t offer the same kind of defensive proposition as the rest of its industry. 

Shares in Utilitywise have lost 23% of their value year-to-date and currently trade at an extremely attractive forward P/E of 7.1 and City analysts are expecting the company to report earnings growth of 25% this year and 8% for 2017. 

That being said, Utilitywise is no stranger to controversy. The company has come under scrutiny in the past for its accounting, and some analysts are worried about the firm’s exposure to small businesses, which are likely to suffer more than most in any economic downturn. 

When it comes to the question of Utilitywise’s accounting practices, it looks as if the concerns are unfounded. One way to quickly spot if a company is inflating profits is to look at cash flows, which are harder to manipulate. For the period ending 31 July, Utilitywise reported a cash inflow from operations of £12.4m, compared to net income of £18.4m. Working capital changes accounted for the majority of the difference in the figures. Put simply; the company is generating plenty of cash and it looks as if there’s nothing to be worried about. 

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Rupert Hargreaves has no position in any shares mentioned. 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.

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