Stocks that are close to or at their 52-week lows usually mean one of two things. Either the stock is heading towards being undervalued or something is fundamentally going wrong at the business.
In order for me to find out, I have to do some research. For some unloved growth stocks right now, a drop can represent a great buying opportunity. Here’s one that I’ve spotted.
Details of the business
The firm I’m talking about is Man Group (LSE:EMG). It has the badge of being the largest publicly traded hedge fund in the world. Sitting in the FTSE 250, it has a market cap of £2.59bn and a current share price of 211p. This price is close to the 52-week low of 203p, with the stock down 10% over the past year.
To some retail investors, understanding what the hedge fund does can seem complicated and jargon-filled. For example, the Q2 updates opens with a statement that the firm has “upgraded our outlook on credit long/short strategies and downgraded macro quantitative”.
Yet fundamentally, an investor doesn’t need to understand every single trade idea that the fund implements. Rather, the focus is on whether the company is good at what it does. In the case of Man Group, it certainly is. The 2022 results showed that core pre-tax profit hit a 14-year high, despite not being the easiest year to navigate in financial markets!
Reasons for the stock fall
If everything was going so well, why is the stock falling? It’s a valid question, with several answers. Late last year, it reported outflows of investor funds of £400m in Q3. This was due to rocky market conditions particularly in the currency markets. This pushed the share price down. If people are pulling their cash out of the fund then it shows sentiment and confidence isn’t high.
Another point of potential concern going forward was the announcement earlier this year that director and chair John Cryan is going to retire. Even though a successor has already been announced, Cryan had great tenure with Man, having served as a director since 2015. When he does leave, it’ll be a loss of expertise and a steady hand at the helm. Inevitably this is a short-term negative for the company.
Why it’s a bargain right now
I feel that the stock could be a great long-term buy. At the current price, the growth stock has a price-to-earnings ratio of just 5.57. Anything below 10 is a metric I use for starting to be potentially undervalued, so 5.57 is certainly attractive.
The business is also not exposed to the UK economy in the sense of dealing with retail clients struggling with the cost-of-living crisis. This makes it a good hedge against other stocks in the FTSE that could face lower demand from this part of the market place.
Due to the falling price, it has helped to push up the dividend yield. This now sits at 5.95%, comfortably above the average FTSE 250 yield of 3.19%. To be able to take advantage of this move, investors would want to lock in the share price at current levels.
