As a long-term value investor, I often scour the FTSE 100 and FTSE 250 indexes for undervalued shares.
Ideally, I’m looking for good businesses whose shares trade on low multiples of earnings and offer market-beating dividend yields. In my latest search of the mid-cap index, I found one cheap FTSE 250 stock hiding in plain sight.
A 240-year-old business
My hidden treasure is investment manager Man Group (LSE: EMG) — the world’s largest listed hedge-fund firm.
Although the company uses highly sophisticated algorithms to trade securities globally, its origins date back to 1783. Indeed, the brokerage firm’s contract to supply the Royal Navy with rum ran from 1784 to 1970.
Over two centuries, Man grew to become a major player in trading commodities such as sugar, rum, coffee and cocoa. This trading expertise eventually led the group to become a leading asset manager, using systematic-trading strategies in financial markets.
The group listed in London in 1994 and in 2000 split into privately owned commodity trader ED&F Man and quoted financial firm Man Group.
This London-based company now employs more than 1,400 people worldwide. At end-2022, it managed assets worth $143.3bn (down 4% in a year) for a wide range of private and institutional investors.
Man Group shares slide
Earlier this year, this FTSE 250 stock was riding high. Just over a month ago, it hit a five-year peak of 293.8p on 3 March. Since then, this stock has fallen steeply, as a banking crisis rocked global markets.
Last week alone, this stock fell almost 13%, making it the second-worst performer in the FTSE 350 index. Here’s how the shares have performed over eight different periods:
| Current share price | 210.6p |
| One week | -13.0% |
| One month | -26.4% |
| Three months | -5.6% |
| Six months | -8.0% |
| One year | -13.4% |
| Two years | +28.0% |
| Three years | +67.5% |
| Five years | +20.5% |
Looking at this table, I see two trends. First, Man Group shares have been weak in 2022-23, losing more than a quarter of their value in one month. Second, this stock has produced positive returns over two, three and five years.
To me, this suggests that this £2.6bn firm’s stock may be a victim of short-term selling weakness. But as a long-term investor, my goal is to capture future cash dividends and capital gains. Hence my recent keen interest in this sliding stock.
I’d gladly buy this share today
What’s more, Man Group’s current fundamentals seem very attractive to me. After March’s steep falls, this share trades on a historic price-to-earnings ratio of 5.7, for an earnings yield of 17.5%.
In addition, its dividend yield of 6% a year is way ahead of the FTSE 100’s yearly cash yield of 3.7%. Even better, it’s covered 2.9 times by earnings, which is a solid margin of safety. Also, the group is buying back another $125m (£101m) of its shares.
Obviously, as a leading hedge-fund manager, Man Group’s earnings can fluctuate widely, especially in volatile markets. And if financial markets melt down again, the company’s stock could take another beating. Also, a run of poor fund performance could lead to clients withdrawing funds.
Even so, this FTSE 250 share looks far too cheap to me. Hence, I’ve added it to my buy list today. If only I had some spare cash to buy it right now!
