2 deep value stocks trading at big discounts

Roland Head highlights one stock he’d buy, and one he’d avoid.

| More on:

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.

Spotting deep value stocks can be a profitable way to invest. These shares can sometimes provide rapid and spectacular gains. But true bargains are fairly rare. Cheap stocks are often cheap for a good reason.

In this piece I’m going to look at the investment case for two potential value buys.

Will boardroom clearout lift shares?

Gold production at Russia-focused miner Petropavlovsk (LSE: POG) rose by 19% to 232,400 ounces during the first half of 2017. According to the group’s half-year trading update, full-year production guidance remains unchanged at 420,000 to 460,000 ounces.

The group’s share price has also remained unchanged following today’s update. But the company’s boardroom has seen big changes recently. Founder Peter Hambro has been ousted from the chairman’s position and demoted to non-executive director.

And his longstanding business partner Pavel Maslovskiy announced on Monday that he has resigned from his role as chief executive.

Petropavlovsk survived a debt-fuelled crisis in 2014/15 by persuading shareholders to back a major refinancing deal. But some shareholders have been disappointed by the firm’s decision to fund expansion projects rather than focusing on debt reduction.

Management said today that net debt has fallen by 5% to $570m (£438m) over the last six months. That’s still very high, in my view, given that the group’s market cap is just £231m, and 2017 net profit is expected to be just £35.7m.

The shares currently trade on a forecast P/E of about 3.5, and at a 50% discount to their book value of about 12p per share. I believe there should be an opportunity here, but I’m concerned by management’s focus on expansion and the slow pace of debt reduction. In my view, there are better buys elsewhere in the gold mining sector.

The right time to buy?

Gulf Marine Services (LSE: GMS) has a new and modern fleet of jack-up rigs of the kind used by the offshore oil and gas sector. The problem is that rental demand is fairly weak at the moment. This could make it difficult for the firm to service and repay its net debt of $370m.

To put these borrowings in context, $370m is more than two years’ revenue at current levels, and eight times 2018 forecast profits of £44m.

At the current price of 55p, Gulf Marine stock trades at a 44% discount to the firm’s book value of 98p per share. That discount represents a potential opportunity, as the firm’s fleet build-out programme is now complete. Spending should fall sharply, providing surplus cash to reduce debt levels.

Analysts also expect the firm’s profits to rise significantly over the next year. The group is expected to report adjusted earnings of 6.8 cents per share for 2017, rising by 83% to 12 cents per share in 2018. This puts the stock on a 2017 forecast P/E of 10.8, falling to a P/E of 5.9 for 2018.

If oil market conditions become more favourable in 2018 — as I suspect they might — then Gulf Marine Services could be a profitable buy at current levels. But I’d only want to hold this share as part of a diversified portfolio. In my view, the level of debt involved mean that this stock is still quite risky for equity investors.

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.

Roland Head 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

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The Legal & General share price has gone nowhere. Why?

The Legal & General share price has performed much worse than the the FTSE 100 over the past five years.…

Read more »

Investing Articles

Where will the BT share price go in the next 12 months? Here’s what the experts say

The BT share price has been sliding for years. But after the latest set of results, it looks like the…

Read more »

Investing Articles

Are National Grid shares now a brilliant bargain?

National Grid shares look exceptionally cheap following last week's selloff. Is now the time to buy the FTSE 100 firm…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Up more than 15%! — this small-cap company is delivering phenomenal dividend growth

There’s more good news in this company’s interim report and it may be shaping up as a decent dividend growth…

Read more »

Electric cars charging at a charging station
Investing Articles

Big news for Tesla stock investors!

Tesla has just quietly dropped a key target it set for itself just a few years ago. What does this…

Read more »