2 quality stocks that look seriously undervalued

Paul Summers thinks now might be a great time to buy these top quality companies.

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Buying quality companies with temporarily depressed share prices can turbocharge your wealth when sentiment eventually returns. Here are two stocks that I think could rebound strongly over the medium term.

Boring but brilliant

At first glance, kitchen supplier Howden Joinery (LSE: HWDN) might not set your pulse racing. Take a look at the performance of its shares since the dark days of the financial crisis however, and your opinion of this company might change dramatically.

Back in 2009, Howden’s stock was trading around 13p. Fast-forward eight years and any capital you had the courage to invest would have grown by a staggering 3,200%. 

Why is this relevant in 2017? Simply because 2016 saw investors lose confidence in Howden following June’s shock referendum result. With Brexit looming, many are questioning whether the good times can continue. Based on today’s full-year results, I don’t think there’s any cause for alarm. 

In 2016, group revenue rose to £1.3bn (2015: £1.22bn) with profits before tax increasing 8% to £237.0m. Despite softer trading conditions in the second half, Howden also grew its customer base by 30,000 (to 450,000 in total) while opening 23 new depots in the UK and continuing to trial its depots in Europe (specifically France and Germany).  

While volumes have weakened slightly over the past few months, management believe the company to be “well positioned to respond to a change in market conditions”. The fact that the outlook for 2017 “remains unchanged” is surely a sign of confidence. 

Trading on a price-to-earnings (P/E) ratio of 15 for this year, shares in Howden look good value to me, especially if our forthcoming departure from the EU isn’t quite the disaster some are predicting.

With a wonderfully robust balance sheet (net cash of almost £227m at year-end) and a long history of generating returns on the capital it invests of between 40% and 50% annually, Howden has all the hallmarks of a quality business.

The 2.7% yield on offer might look average, but with dividends covered almost 2.5 times by earnings in 2017, these payouts look very safe for now.

Still in good shape

Holders of stock in fund manager Aberdeen Asset Management (LSE: ADN) have endured a tough few years. Since peaking just above 500p in April 2015, the company’s shares have been on a downward trajectory ever since and now change hands for 270p. Despite this, I’m inclined to agree with CEO Martin Gilbert’s recent assertion that the £3.5bn cap “remains in good shape“.  

While assets under management have dipped in recent times following concerns over the health of emerging markets, there are signs that things are improving. Gross inflows during the last three months of 2016 came in at £10.2bn — a 21% increase on the £8.4bn during the previous quarter. The company also reported strong returns for the year, despite a fall in sentiment following Donald Trump’s election victory in November. As far as outflows were concerned, the company reported the bulk of these were “largely lower margin and anticipated“.

Trading on a P/E of 13 for 2017 (falling to 12.5 in 2018 based on earnings estimates), Aberdeen is cheaper than industry peers like Jupiter Fund Management and has a very strong balance sheet. Assuming it can attract clients back from lower-cost passive investments, implement promised cuts and maintain its generous yield (currently 6.4%), now could be a great time to buy a slice of the firm.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management and Howden Joinery Group. 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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