What is a value share? I’d argue a stock needs to assign a low-looking valuation to its underlying business, at the very least.
There’s more to ‘value’ than ‘cheap’
But billionaire investor Warren Buffett once said that value and growth are joined at the hip.
In other words, there’s a big difference between uncovering mere cheapness and finding real, enduring value.
And the problem with cheap-but-rubbish businesses is they often tend to become even cheaper after we’ve bought their shares.
So it’s important to tread carefully when hunting for value shares. And that’s why Buffett reckons he prefers to pay a fair price for a “wonderful” business rather than a cheap price for a poor business.
Nevertheless, cheapness — as determined by the traditional valuation indicators — is a reasonable place to begin with stock research. And three stocks have caught my eye right now.
A difficult sector
The first is construction, engineering and consultancy contractor Costain (LSE: COST). With the share price around 55p, the valuation indicators look undemanding. And there’s a net cash position on the balance sheet.
Meanwhile in March, the company delivered an upbeat full-year report with decent showings for revenue, profits and cash flow in 2022. And City analysts predict chunky single-digit percentage advances for earnings this year and in 2024.
However, the sector is a difficult one. And, within it, many similar businesses have failed over the years. In fact, Costain has endured several internal financial crises over its long history.
The most recent of such events was in 2020. And the company raised around £100m from shareholders to shore up its then-creaking balance sheet. Indeed, the long-term earnings history shows much volatility.
Nevertheless, the immediate future looks bright for the business. And I’d consider the stock now, despite the risks.
Construction looks tempting
But I also like the look of construction and regeneration company Morgan Sindall.
In May, the company issued a steady-as-she-goes trading update. And City analysts have pencilled in single-digit percentage earnings increases for this year and next.
Of course, such estimates are not chiselled into stone and could easily change – after all, construction and building is another cyclical sector fraught with challenges.
But with the stock near 1,824p, the valuation looks undemanding. And there’s a net cash position on the balance sheet with a chunky shareholder dividend for investors to collect. This one is firmly on my radar now.
Meanwhile, from the wider building sector, my third choice for further research is housebuilding and land promotion specialist MJ Gleeson.
The business focuses mostly on building affordable homes for first-time buyers. And, as such, the enterprise is exposed to the ups and downs of the property market and the wider UK economy.
However, trading in the year to June 2022 was ‘workmanlike’. And the longer-term supply/demand backdrop looks encouraging for the industry.
With the share price near 443p, Gleeson has a fair valuation and a decent dividend yield. And there’s a modest net cash position on the balance sheet. So despite the risks, I’m keen to dig deeper into this one now.
