I love buying ‘value stocks’, defined as a company trading below their fundamental value. It feels like buying a slice of a business on the cheap. Often, that comes with a higher dividend yield too. Yields are calculated by dividing the dividend by the share price, so if the share price is down, the yield is likely to be higher.
As with any approach to buying shares, success isn’t guaranteed. Company stocks can be cheap for a very good reason, so I do careful research to find out why.
Bargain UK shares
Finding bargains is fairly easy when the market is down, but what about when the FTSE 100 is breaking one new high after another? Yesterday (29 October) the blue-chip index closed at a new record of 9,756.14. Investors keep warning of a stock market crash, yet the market refuses to listen.
Despite an 18% climb year to date, plenty of FTSE 100 stocks remain attractive. Rising markets lift most boats, but not all. Some sectors lag, such as housebuilders today, or face structural threats from innovation, management errors or changing consumer habits. That leaves entry points for patient investors to benefit if management can turn things around.
Checking the numbers
When looking for value, I typically start with the price-to-earnings ratio. This divides a company’s share price by its earnings per share. A P/E of 15 is considered fair value, but bargain hunters like me look for 12 or less. Plenty of FTSE 100 stocks fit the bill, including two I already own.
JD Sports Fashion trades on a P/E of 7.9 and British Airways-owner International Consolidated Airlines Group, or IAG, at 8.3. JD Sports is down 25% over 12 months, IAG up 93%. I think they’re both worth considering but only after understanding why their fortunes have differed so sharply. It pays to dig into recent results.
I’m tempted by ICG
One stock I’ve had my eye on for some time is private equity and alternative asset manager Intermediate Capital Group (LSE: ICG). Its shares have fallen 8% in the last year but remain 52% higher over two years.
ICG provides debt and equity capital, offering an alternative to traditional banks. The shares dipped in recent days on fears about troubles in the US shadow banking sector, rather than issues with ICG itself. That could be an issue if the sector is in trouble.
The business has had a strong run lately, with assets under management growing strongly. The dividend record is excellent, rising every year since 2000 (the sole exception was 2009, during the financial crisis). Over the last decade, dividends increased at an impressive average rate of 14% a year. Today, the trailing yield is 4.24%.
There are risks. Prolonged global trade uncertainty could reduce returns from private equity. High interest rates increase the cost of capital and slow small business expansion. But patient investors can benefit. I think ICG Is well worth considering today, with a long-term view.
