2 dirt cheap value stocks looking like hidden gems

Could these falling stocks now be too cheap?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Trinity Mirror (LSE: TNI) has so many problems it could win an award for one of the market’s most hated companies. Operating in what many believe is a dying business, Trinity has been under pressure in recent years thanks to the phone-hacking scandal, as well as falling print advertising revenue. Recently, a new threat has emerged in the form of rising pension obligations, which threaten to destabilise the business if not brought under control.

However, against this glum backdrop, management has continued to push the business forward acquiring peer Local World last year, devoting funds to develop the group’s digital business, paying down debt, initiating dividend payouts and starting a stock buyback. 

And despite all of Trinity’s problems, there is a decent business hidden away somewhere. You just need to look at the figures to see that the company is a cash machine and despite falling revenues from advertising, there is still a strong customer base. 

Cash cow

According to results for the 53 weeks ended 1 January, adjusted operating profit grew 25.5% thanks to the acquisition of Local World, and the firm generated nearly £80m in cash from operations, all of which was used to reduce debt. For a company with a market capitalisation of £263m, an operating cash flow of £80m is extremely impressive. 

Still, despite this cash flow, it’s unlikely negative sentiment surrounding the company will dissipate anytime soon. A trading update published today shows that for the 26-week period ending in July, group revenue is expected to fall by 9% following a 12% decline in print revenue offset by a 5% increase in digital sales. The company also announced today that it has increased provisions for settling historical legal issues to £7.5m and paid an additional £7.5m into pension schemes. It’s clear Trinity has issues, but its valuation reflects this and any improvement may lead to a substantial re-rating. At the time of writing, the company is currently trading at a forward P/E of 2.5 and support a dividend yield of 6.7%.

Cheap income 

Like Trinity, beaten down retailer Debenhams (LSE: DEB) is also trading at a bargain-basement valuation, which could offer tremendous upside if trading performance begins to improve. 

Shares in the company are currently trading at a forward P/E of 6.7, and even though City analysts expect earnings per share to decline by 16% this year, earnings declines are projected to moderate next year. The company is still highly profitable with an average pre-tax profit of £90m predicted for the next two years. This healthy profit should easily cover the company’s dividend payout during the period. 

Analysts expect the firm to pay a dividend of 3.4p per share for the next two years, which is equal to a yield of 7.7% at current prices. Based on this, even if the shares go nowhere, investors will still receive a return of 15%. If trading begins to turn around, the returns could be even higher as the market turns positive on the shares.

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could Helium One be a millionaire-maker penny stock?

Shares of Helium One Global (LON:HE1) have soared 272% so far this year. Should I buy this penny stock while…

Read more »

Investing Articles

Are these 2 unsung FTSE blue-chips the passive income stocks I never knew I wanted?

Harvey Jones says that the FTSE 100 contains fantastic passive income stocks with deceptively modest yields. Here are two he's…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Shhhh… These FTSE 250 stocks have quietly more than doubled in 2024

Forget those US tech titans. Our writer takes a closer look at two supposedly 'boring' FTSE 250 stocks that have…

Read more »

Investing Articles

As the Diageo share price flies on a double upgrade is this my last chance to buy it on the cheap?

The Diageo share price has inflicted plenty of pain on Harvey Jones in 2024, but suddenly it's serving up a…

Read more »

Investing Articles

7%+ yields! 3 choices to consider for a Stocks and Shares ISA

Christopher Ruane highlights a trio of FTSE companies each yielding over 7% he thinks investors should consider for a Stocks…

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

How investors might try to turn £10,000 into a chunky passive income

Our writer Ken Hall looks at how the magic of compounding returns might help investors to create a handy second…

Read more »

Investing Articles

Here’s how to cut a coffee a day and invest in 2 stocks a month to aim for a £65k second income

Millions of us would love a second income, but it’s easier to achieve than we may realise. Dr James Fox…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Dividend Shares

Trading under 10 times earnings, is the easyJet share price too low?

Ken Hall assesses whether there's still value in the easyJet share price after recent gains following a strong annual results…

Read more »