When it comes to investing in the stock market, very few things are guaranteed. Yet it’s always true that if a UK share is undervalued, it will eventually return to a fair value. Of course, this can sometimes take a long time before the share price adjusts. But from my experience, nothing stays cheap forever. Here are two stocks I think look a bargain right now.
Poised for take-off?
TUI AG (LSE:TUI) was one of the firms hardest hit by the pandemic. As a flight and holiday operator, lockdowns meant business all but dried up. Even over the course of 2021, many were cautious about going abroad again.
This long road back to financial recovery has been reflected in the share price. Even if I take out the volatility around the stock market crash in early 2020, the share price is still down 58% over the past three years. Over the last year, it’s down 36%.
I think the main risk going forward is investors being too pessimistic and writing the firm off.
At the current levels, I think the stock is dirt cheap. This is based on what future earnings could look like. The business recorded a profit after tax of €532m in 2019. After losing billions in 2020 and 2021, the loss for 2022 shrunk to €212m. In the latest update for 2023, the report said “we reconfirm our expectations to increase underlying EBIT significantly for FY 2023”.
So it’s clear to me that within the next couple of years, TUI should flip back to a similar level of profitability seen in pre-pandemic 2019. If this is correct, then the share price should jump considerably from its current low.
Finding the plus side
The other firm on my radar is Plus500 (LSE:PLUS). The FTSE 250-listed online retail trading platform has struggled over the past year. This has been due to lower volatility in some markets and also heightened competition. As a result, the share price is down 20% over the past year.
Despite this, the company has been pushing to grow in key markets. This includes the US, Japan and the UAE. The Q3 update showed this expansion is going well.
The stock looks cheap to me based on both the present and future readings. As we currently stand, the price-to-earnings ratio is 4.9. This is dirt cheap, far below the benchmark figure of 10 that I use to assign a fair value.
Looking at the future, the investment being made to push into large new markets could yield some fantastic results. Granted, this push can also be seen as a risk, with competitors jostling for market share. Yet any increase in revenue can filter down quickly to the bottom line. This is thanks to the high EBITDA margin of 48%. Put another way, Plus500 has a low cost base that allows more revenue to turn into profit.
I believe investors should take a closer look at both ideas.