Finding value shares in a stock market that seems to be full of optimism – especially in the US – isn’t easy. But there are a couple of shares I’ve bought on this side of the Atlantic.
In both cases, companies are looking to sell off some of their less attractive divisions. And I think this has the potential to unlock significant value for shareholders in 2025.
Anglo American
Earlier this year, BHP thought they saw value in FTSE 100 mining company Anglo American (LSE:AAL). And I think they were right to take this view.
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The firm has some interesting assets in copper and iron ore, as well as some less promising ones in platinum, coal, and diamonds. But the company is looking to divest these.
Earlier this week, Anglo American announced the finalised sale of its coal assets for a total of $4.9bn. That’s around 15% of the company’s current market cap.
The risk going forward for the business is demand for copper falters in the future. And the biggest chance of this is if the energy transition takes longer than expected.
Despite this, I think Anglo American has the right strategy and the cash released by the divestitures should offer good value for investors. That’s why I’ve been buying the stock.
I do expect the opportunity to become less attractive as the company restructures, though. So while I like the look of the business for the long term, I’m also after the short-term benefit.
Dowlais
Since it was divested from Melrose Industries in April 2023, Dowlais (LSE:DWL) shares have fallen 60%. And at first sight, the underlying business doesn’t look great, either.
Revenues have been falling, the company has been reporting losses, and the balance sheet looks heavy on debt. But all of this is hiding what could be a very attractive opportunity.
Things aren’t as bad as they look, though. A combination of a cyclical downturn and one-off costs have been weighing on sales and profits and the firm has a plan to fix its debt.
Dowlais has two operating divisions – Automotive and Powder Metallurgy. And it’s looking to sell off the latter, which generated £96m in operating profits in 2023.
The big risk is that it won’t be able to achieve a decent price for the unit, which would make the investment equation much less attractive. If it can, though, I think things look very promising.
Dowlais achieving eight times 2023’s operating income would generate cash equivalent to the firm’s entire market cap. And in that situation, I wouldn’t be worrying about the firm’s debt.
Warren Buffett
Both Anglo American and Dowlais look to me like decent companies trading at excellent prices. And as Warren Buffett points out, the reverse is usually preferable.
I agree with this. But Buffett has also said that if he were starting again, he would look for undervalued opportunities – and that’s what I think I have here.
From a valuation perspective, there’s enough short-term return enough for me to buy both shares at today’s prices. Over the longer term, I’ll look to see how things develop before deciding how long I want to keep them for.
