A stock market recovery, when it comes, tends to reward a specific type of share: one where the business is in good shape but the price has been dragged down by sentiment rather than fundamentals. High quality, cheap valuation, weak momentum — that’s the combination worth hunting for right now.
The theory is quite simple. Quality companies trading with a discounted valuation will eventually come good, especially if there’s a catalyst. Don’t get me wrong, I normally like to invest in stocks that are going up — positive momentum — but the Iran conflict has pushed the stock market into correction territory. Good businesses are trading a great prices.
Here are two worth watching.
Jet2
The leisure travel group has had a torrid year on the market. Shares are down around 40% from their 52-week high and sit nearly 17% below the 200-day moving average. However, the underlying business tells a very different story.
Revenue has grown at nearly 15% annually since 2020, and the company sits on net cash of over £800m — on a market cap of just £2.27bn. That’s extraordinary balance sheet strength for a travel company.
At a forward price-to-earnings (P/E) of just 6.5 times, it looks cheap compared to peers. But the real discount appears when we adjust for net cash.
Analysts have a consensus price target of 1,694p — roughly 47% above today’s 1,151p.
There are always risks. The end of the conflict in Iran could boost sentiment, but a prolonged conflict could impact margins. Fuel accounts for up to 35% of operating costs. The company has hedged over 75% of its fuel for FY27 and that provides some shelter… but the longer the oil prices remain high, the more it’ll impact the business.
Airbus
Airbus is one of only two companies in the world capable of building large commercial aircraft at scale. But it looks cheap for an industrial in a duopoly. It’s also cheap compared to Boeing (FY28 P/E of 15.5 versus 24.4) and has strong net cash position, unlike its American peer.
With a price-to-earnings-to-growth (PEG) ratio of just 0.8 times on 2028 forecasts and revenue heading towards €100bn, this looks like a quality compounder trading at a meaningful discount to its earnings trajectory.
Of course, the risks are well publicised. Airbus’s most pressing near-term challenge is its supply chain. The company has repeatedly missed its own delivery targets due to engine shortages and component delays. Any further production setbacks would push back the attractive 2027–28 numbers.
The bottom line
Both companies share the same profile: the business is in good shape; the share price has forgotten that. That’s often where recoveries begin.
These are actually two of the larger holdings in my ISA. In fact, excluding investments held in my SIPP, these are my two largest holdings on this side of the Atlantic.
Needless to say, I think they’re both worth considering.
