Value investing’s about buying shares for less than their intrinsic value. But estimating what a company’s worth can be challenging, even for the likes of billionaire investor Warren Buffett.
Stocks don’t come with labels that say when they’re undervalued, but there are some things investors can look for. And I think there are a couple of interesting candidates right now.
3i
3i Group‘s (LSE:III) been one of this year’s better-performing UK shares. But I think the stock’s still worth considering for value investors looking for opportunities.
At a price-to-earnings (P/E) ratio of just under 8, investors might not expect much in the way of growth. But there’s a lot going on beneath the surface that’s worth paying attention to.
The firm’s largest investment is in Action – a discount retailer based in the Netherlands, which 3i values at around £12bn. This makes up around 66% of the investment portfolio.
Investors should note the company’s valuation of its asset might be on the aggressive side. The likes of peers B&M European Value and Five Below both trade at lower multiples of sales.
Action however, has been growing impressively. Sales are up 22% over the last 12 months and margins have been expanding, boosting profitability.
I think that makes the value equation on 3i shares quite interesting, especially with the stock trading at a low P/E multiple.
Pfizer
The end of the pandemic heralded a downturn for the Pfizer (NYSE:PFE) share price. Falling demand for Covid-19 vaccines – predictably – caused sales and profits to fall.
On top of that, the company’s fallen behind the likes of Eli Lilly and Novo Nordisk in the race to develop anti-obesity drugs. But I think the stock looks interesting at the moment.
The challenge with pharmaceutical stocks – especially big ones – is growth. With just under $60bn in annual sales, generating meaningful revenue growth isn’t easy.
Furthermore, assessing the strength of Pfizer’s pipeline is far from straightforward. Doing this accurately involves a lot of technical knowledge that most investors are unlikely to have.
That’s why it’s important to insist on a margin of safety with this type of business. And I think this is available right now for investors considering buying the stock.
Analysts have an average price target of $34.10 – almost 18% above than the current level. And while value stocks aren’t known for being innovative, Pfizer’s a lot going for it.
Investors need a short memory to forget how quickly the company developed a Covid-19 vaccine in an emergency. So I wouldn’t count them out of the GLP-1 industry just yet.
Value investing
Value investing isn’t just about buying shares that trade at low multiples. A lot of the time, stocks trade at discount prices because the underlying businesses have permanent problems.
When looking for a margin of safety though, this can be a good place to start looking. And I think both 3i and Pfizer are interesting opportunities for value investors to consider.
