5 Dirt-Cheap Stocks: Trick Or Treat?

Are the valuations 3i Group plc (LON:III), GKN plc (LON:GKN), J Sainsbury plc (LON:SBRY), Petrofac Limited (LON:PFC) and GlaxoSmithKline plc (LON:GSK) a trick or a treat?

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Value traps are something that all investors must be well aware of. Indeed, just because a company’s share price is cheap does not necessarily mean it’s a great investment. It could be cheap for a reason that harms its future performance, for example.

On the other hand, even with the FTSE 100 above 6,500 points, there could still be some bargains around. With that in mind, are these five shares worth buying at their current, low levels? In other words, are they tricks, or treats?

3i

With a price to earnings (P/E) ratio of just 7.9, 3i (LSE: III) is dirt cheap. That’s despite outperforming the FTSE 100 during the last year, with shares in 3i being up 6% versus a 3% fall for the FTSE 100.

Of course, 3i’s bottom line is volatile. That’s due to it being an investor in other companies, with start-up tech companies being a particular specialism of 3i. As a result, profitability can fluctuate considerably and, as was the case in 2012, turn to a loss.

Still, with a number of potential winners in its portfolio and a dividend yield of 3.4% that is covered 3.8 times by profit, now could be a great time to buy 3i – especially for long-term investors.

GKN

Automotive and aerospace specialist GKN (LSE: GKN) trades on a P/E ratio of just 11.8. Although this year is set to see profits fall by 6%, GKN has become a much more reliable stock in recent years since it became more involved in the steadier (compared to automotive) aerospace industry. As a result, profit has grown in each of the last four years.

With GKN set to return to growth next year with a bottom line rise of 6%, now could be a great time to buy a slice of the company. Furthermore, a payout ratio of just 31% suggests dividends can go much higher and GKN’s yield could expand considerably from the current 2.6%.

J Sainsbury

Clearly, J Sainsbury (LSE: SBRY) is going through a rough patch. The supermarket price war is taking its toll on the company’s bottom line and, although J Sainsbury remains highly profitable, shares in the company now trade at just 80% of their net asset value.

While dividends are being cut, J Sainsbury still yields over 5% and, more importantly, dividends remain well covered at two times earnings. With wage rises set to outstrip inflation next year for the first time in seven years, 2015 could be the year that J Sainsbury mounts a fight back.

Petrofac

With the oil price having fallen by over 25% this year, oil services company Petrofac (LSE: PFC) has seen its share price drop by 13% year-to-date. It now trades on a P/E ratio of just 10.1 and seems to offer great value for money.

For example, Petrofac is forecast to increase its bottom line by a superb 19% next year. This puts it on a price to earnings growth (PEG) ratio of just 0.5 and shows that upside potential does remain. Although the oil price could disappoint in the short run, Petrofac seems to be well-placed to deliver share price growth in 2015 and beyond.

GlaxoSmithKline

With a trailing P/E of just 12.6, GlaxoSmithKline (LSE: GSK) looks like a bargain – especially when the FTSE 100 has a P/E ratio of 13.8. However, the pharmaceutical major is due to report a decline in earnings of 17% in the current year, which means that its trailing P/E could soon rise to around 15.1.

Despite this, GlaxoSmithKline still looks like a great buy. It has a fantastic long term pipeline of new drugs and, with a yield of 5.7%, also has huge appeal as an income play. While the short term may be somewhat volatile due to potential restructuring and pressure from generic drugs, GlaxoSmithKline could prove to be a real treat in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares in GlaxoSmithKline, 3i, J Sainsbury and Petrofac. The Motley Fool has recommended shares in Glaxo and Petrofac.

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