Today I’m looking at three stocks that may be near year-lows but should be worth watching.
Barclays (LSE: BARC) is one of the cheapest bank stocks on the market right now. It currently trades at a forward P/E of 10.6 and has a price-to-book (P/B) ratio of just 0.62. A stock with a P/B ratio of less than 1.0 is generally regarded as undervalued, so with Barclays trading at less than two-thirds of its book value, it’s really cheap.
But we all know cheapness alone isn’t enough to justify buying a particular stock. There are a lot of reasons why Barclays is so cheap. Firstly, it’s earning a very low return on a significant proportion of its assets, particularly those relating to its investment bank and its non-core European business. Weak profitability at the bank is also not helped by the high cost of the financial penalties it has continued to pay. In addition, frequent management changes at the bank and the introduction of new regulation have created a great deal of uncertainty over its future direction.
Barclays’ third quarter earnings show how difficult it is to turn around its profitability, with earnings growth falling back into negative territory. Adjusted pre-tax profits fell 10%, to £1.6bn, offsetting much of the improvement earlier in the year. Overall, adjusted pre-tax profits grew by a mere 4% year-on-year to £5.2bn in the first nine months of 2015.
That said, city analysts are still optimistic for Barclays’ longer term prospects. They’re currently expecting underlying EPS to grow by 24% this year, to 21.5p. In 2016, earnings should grow by another 21%, to 25.9p. This indicates its shares trade at just 8.6 times its expected 2016 earnings.
Shares in Old Mutual (LSE: OML) have recently been sold off, as investors seek to reduce exposure to slowing emerging markets. Slower economic growth in such markets and weaker emerging market currencies are expected to lower expectations of future earnings growth. But so far, earnings remain robust.
Gross sales rose 31% in the three months to 30 September 2015, despite the volatile macro-economic backdrop. Driving the improvement were higher management fee revenues and strong pension sales, which grew 71% following changes in UK pension rules.
It seems that Old Mutual’s diversification, both geographical and across different financial products, allows it to generate stable earnings even as some markets slow. Looking longer term, Old Mutual’s brand, business model and market position should mean it would deliver long term value for its shareholders. Trading at a forward P/E of just 10.1 and offering a prospective dividend yield of 4.7%, value investors should keep an eye on Old Mutual’s shares.
Fashion and homewares retailer Laura Ashley (LSE: ALY) similarly trades near its 52 week lows. The company may be long past its history of heady growth rates, but valuations seem to be too cheap for a company that is financially very healthy.
In the first half of its 2015 financial year, pre-tax profits fell by 1.2% to £8.4m. But declining licensing and franchise revenues because of weakness in Russia, Ukraine and Japan were largely to blame. The performance of the stores the group actually controls is doing much better, with like-for-like retail sales growth of 7% and online sales rising by 5.4%.
Laura Ashley is currently valued at 11.2 times its forward earnings estimate, and pays out a market-beating 6.7% dividend yield.
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These five large-cap shares have been selected for their combination of income and growth prospects. They generate stable cash flows from their dominant market positions and broad global exposure.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.