Finding shares which are trading at bargain levels is becoming increasingly difficult. In the last year, the FTSE 100 and FTSE 250 have risen by 18% and 13% respectively. Therefore, many stocks now appear to be fairly valued. However, there are still some companies which appear to have passed under the investment radars of most investors. Here are two prime examples of dirt-cheap stocks.
Better-than-expected performance
On Thursday, service distributor Electrocomponents (LSE: ECM) reported better-than-expected performance for its recent financial year. Its update showed an 8% rise in revenue for the most recent quarter, which was driven by a strong recovery in North America. Revenue in that region increased by 16%, while growth in Europe of 5% and in Asia Pacific of 9% was also relatively impressive.
E-commerce saw revenue growth of around 8% in the most recent quarter. It now accounts for around 60% of revenue and provides further long-term growth potential. The company’s end markets remain strong and the business appears to be executing its strategy as planned. Therefore, profit before tax for the 2017 financial year is expected to beat previous guidance.
Looking ahead, Electrocomponents is forecast to grow its bottom line by 11% per annum in the next two financial years. This puts it on a price-to-earnings growth (PEG) ratio of only 1.7. This indicates that its shares are cheap, since demand for its products remains robust. Gains from foreign currency and cost reductions could also boost profitability in the long run, which suggests now could be the perfect time to buy the stock.
High yield
With inflation rising to 2.3% last month, finding positive real-terms income stocks is becoming more challenging. Furthermore, the rate of inflation is expected to increase to 3% or above in the coming months, which could increase demand for stocks with exceptionally high yields.
Insurance and reinsurance specialist Lancashire Holdings (LSE: LRE) could therefore become a must-have income stock. It currently yields 7.9%, which makes it one of the highest-yielding shares in the FTSE 350. It also indicates that the company’s shares are relatively cheap versus their industry and index rivals.
Lancashire Holdings has been able to deliver relatively impressive returns over a long period due to its nimble business model. It allows it to issue shares and quickly raise capital following a major loss event, when the best opportunities are often on offer.
Since much of its revenue is generated in US dollars, it looks set to benefit from weak sterling. With Brexit talks commencing and uncertainty likely to build over the next couple of years, sterling may depreciate further. This could mean higher returns for Lancashire Holdings and its shareholders. With a relatively high return on equity which has averaged 13.5% in the last five years, and a combined ratio which has averaged 76.5% during the same period, now seems to be the right time to buy the company for the long term.
