Looking for value? 2 stocks that look like bargains to me

Elegant Hotels Group (LON: EHG) and Anglo American (LON: AAL) look like bargains, writes Thomas Carr.

| 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.

For decades, Warren Buffett – the investment oracle – has advocated buying stocks that have a margin of safety or, in other words, are valued attractively. In the current economic climate, it’s especially important that investors don’t overpay for stocks. Two stocks that I think are unusually cheap are Elegant Hotels Group (LSE: EHG) and Anglo American (LSE: AAL).

Elegant Hotels Group is an owner and operator of seven luxury hotels in Barbados. Whilst revenue has remained flat since the company’s IPO in 2015, operating profits have risen 58% to $14.1 million last year. In the first half of this year, after-tax profits were up by a whopping 34% from the same period in 2018. Compellingly, the corporation tax rate in Barbados has been reduced from 30% to between just 1% and 5.5%.

The group is committed to leveraging the strength of the brand to both increase sales and achieve savings. With 70% of bookings coming through tour operators, and less than 20% of customers coming from the USA, there is scope to improve direct to customer selling and to focus more on the US market.

EHG also continues to selectively refurbish its existing hotels, leading to higher average room rates and feeding through to the bottom line. In the medium to long term, the group’s strategy is to acquire underperforming hotels and to expand further into the Caribbean. Elegant Hotels Group has already won two management contracts – albeit one has recently been terminated – and this presents a more balance-sheet-friendly way for the group to expand its presence and improve its financials.

The shares trade on a P/E of around seven times last year’s earnings. Not only do I think this is cheap, but it also fails to reflect the future benefit from the reduced corporate tax rate, not to mention a hefty 5% dividend.

But the real value comes from the company’s discount to its net asset value. The reported net asset value of £101 million is over 60% greater than the market capitalisation implied by the current share price. Interestingly, the directors even believe that the real value of the group’s assets is in excess of that reported on the balance sheet.

Over at Anglo American, yearly revenues have grown by an average of 10% since 2015, whilst an after-tax loss of $5.8 billion has turned into a profit of $4.3 billion. Momentum has continued into the first half of 2019, with the miner reporting operating profits up 19% from the same period in 2018.

Anglo American is committed to increasing production and growing margins. The first-half operating margin was a huge 46%, with a target of 50% by 2023. Since 2012 productivity has doubled, whilst unit costs have fallen by 27%.

Not only does AAL pay a juicy 4.9% dividend at the time of writing, but management have also promised that up to £800 million will be returned to shareholders in the form of a share buyback, completed by no later than March of next year.

Just like EHG, the shares trade at a P/E of around seven times last year’s earnings, which doesn’t reflect future earnings growth. The current share price values the company at around the same level as its net asset value which, in my opinion, completely undervalues the impressive return that it generates on its capital.

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.

Thomas has no position in any of the 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

2 powerful passive income stocks investors should consider snapping up

Building a passive income stream via dividend-paying stocks is possible, according to our writer, who details two picks to take…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing For Beginners

This UK stock has gained 42% since I bought it, but I think it’s still a bargain

Jon Smith outlines his reasons for thinking that a UK stock he owns has the potential to keep rallying for…

Read more »

Investing Articles

1 under-the-radar value stock I’m eyeing up for returns and growth

This Fool is looking for quality stocks at bargain prices and reckons this potentially overlooked value stock could be a…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

National Grid shares have plunged — but if I’d bought 2 years ago, would I be in profit?

National Grid shares are about 22% lower than in May, but that may just be a small blip for long-term…

Read more »

Investing Articles

This FTSE 250 stock looks unmissable — but buying shares now could be a mistake for me!

It’s tough when a stock looks fundamentally sound, but there’s a cloud hanging over it. This is what’s happening with…

Read more »

A Black father and daughter having breakfast at hotel restaurant
Investing Articles

Raspberry Pi shares are piping hot! Should I invest right now?

Raspberry Pi shares are certainly bearing fruit for those lucky enough to have invested early. Have I missed the boat…

Read more »

Dividend Shares

How much passive income from stocks could I make with a £37k salary?

Jon Smith takes a look at how much passive income he could make by squeezing all the juice out of…

Read more »

Young female analyst working at her desk in the office
Investing Articles

The Ashtead share price falls on FY results. Is it a good long-term buy?

High interest rates are bad for companies with high debt, especially if it's growing. But the effect on the Ashtead…

Read more »