3 value stocks I’d buy after recent declines

Rupert Hargreaves looks at three value stocks that could be too cheap to pass up after recent declines, and that offer market-leading dividends.

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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.

As stock markets have plunged, a handful of high-quality businesses have suddenly become value stocks.

As such, now could be an excellent time for long-term investors to snap up some shares in these highly attractive operations at discount prices.

Value stocks on offer

Drax Group (LSE: DRX) is currently one of the market’s most unloved value stocks. Shares in the power plant operator are dealing at a price-to-earnings (P/E) multiple of 6. The stock also commands a price-to-book (P/B) ratio of 0.5.

Value stocks are usually defined as those businesses trading at a discount to book value. It looks as if Drax falls into this bracket.

The question is, does the company deserve this valuation?

It does not seem as if it does. Even in the worst-case economic scenario, the UK will still need electricity, and Drax is one of the country’s largest power plant operators. This suggests that the business will continue to earn revenues no matter how bad the coronavirus outbreak becomes.

On top of the stock’s attractive valuation, the company also offers investors a dividend yield of 8.3%. Therefore, investors will be paid to wait for market confidence to return and the stock to recover.

With electricity demand only growing across the UK, investors might not have to wait for long.

Pubic transport

National Express (LSE: NEX) is one of the most efficient public transport operators in Europe and North America. Last year the business reported an operating profit margin of 8.8% compared to the sector average of 7.8%.

Unfortunately, it’s highly likely that the coronavirus outbreak will hurt the company’s operations. However, public transport is an essential service for many people, and demand is only growing as more and more consumers ditch private cars over environmental concerns.

As such, National Express looks well-positioned to stage a strong recovery when the outbreak dies down, and economic activity returns to normal.

Today investors can buy into this recovery play for just 9.2 times forward earnings. The stock also offers a dividend yield of 5.2%. The payout is covered twice by earnings per share, so it looks quite safe for the time being.

These metrics, and National Express’s position in the public transport industry, make it one of the most attractive value stocks on the market today.

Online delivery

High street sales may suffer as consumers stay home to avoid the virus outbreak, but initial indications suggest online sales could grow. Next (LSE: NXT) could benefit from this trend.

While the company does still have a significant high street presence, around half of the group’s sales now come from its online business.

What’s more, this business is highly cash generative. Management has been returning a large chunk of this cash to investors with dividends and share buybacks.

Not only does Next reward its shareholders more than many of its peers, but the company’s healthy profit margins and cash flows means the firm is well-positioned to weather the storm.

Many of its peers might not be so lucky. That could help the company come out on top when the economy recovers. Next could use its size and scale to grab market share from struggling smaller peers.

Therefore, it could be worth buying a share of this high-quality business after recent declines.

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 considered so you should consider taking independent financial advice.

Rupert Hargreaves owns shares in Next. 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.

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