MENU

2 screamingly cheap mid-cap stocks

Thanks to our all-too-human aversion to embracing uncertainty, it’s easy to miss out on some of the market’s best opportunities. As we all should know, the best time to buy a company is often when nobody else will. 

Given this, here are two companies trading on temptingly low valuations that I think warrant closer inspection.

Quality going cheap?

The share price of spread-betting provider CMC Markets (LSE: CMCX) has been on a downward trajectory ever since the company issued a profit warning in September. After peaking at 290p in July, shares now change hands for just under 184p. That’s a drop of over 36%.

Why have investors turned their backs on the company? Well, despite the momentous referendum result, it turns out that markets were less volatile than expected over the summer. And when markets are quiet, there are less opportunities for spread-betters to make money.

The true extent of CMC’s woes was revealed in last month’s set of interim results. Net operating income fell by 4% to £75.5m with revenue per active client down 13% to £1,488. Despite seeing 8% growth in active clients during the first half of the financial year, underlying profit before tax sank 28% to just £18.8m (from £26.2m over the same period in 2015). With figures as depressing as these, it’s unsurprising that some investors voted with their feet.

Will the £527m cap bounce back? I wouldn’t bet against it, particularly as 2017 could be an ‘interesting’ year for the markets. With Donald Trump getting the keys to the White House in January, the French presidential elections in April and Brexit-related confusion likely to continue, investors could be in for a bumpy ride — just the sort of conditions companies like CMC crave.

True, there’s a lot of competition out there, most notably from CMC’s larger peer, IG Group. Nevertheless, the latter trades on a forecast price-to-earnings (P/E) ratio of almost 17. Contrast this with CMC’s far-more-reasonable forecast P/E of just under 12.

There are other things to like about CMC apart from the price. Looking under the bonnet reveals a company achieving consistently high levels of return on capital invested and excellent operating margins. Its net cash position is another positive. Even those who invest for income may be tempted by the easily covered 4.5% yield pencilled-in for next year.

Overdone concerns?

Another company whose shares look cheap is Howden Joinery (LSE: HWDN) — the hugely successful £2.3bn cap kitchen supplier. Our forthcoming departure from the EU may have knocked investor confidence in this stock but I’m left wondering if — with a P/E of 13 — these concerns are overdone. After all, this is a business that has generated exceptionally high levels of return on capital for some time (an annual average of 44% from 2010 to 2015) despite several economic wobbles playing out in the background.

It gets better. Although profits are forecast to stagnate for a while and a further drop in the share price can’t be ruled out, next year’s 3% yield looks very safe. The company’s finances look incredibly healthy, with £182m of cash on its books. Operating margins are also very decent.

If Brexit isn’t the nightmare every man, his dog and his dog’s dog expect it to be, I fully expect sentiment to return to companies such as Howden, even if its admittedly cyclical nature makes it a more riskier option than CMC.

Eager for more?

So long as you're prepared to go against the crowd, buying quality stocks on recent (but possibly temporary) price weakness can be an excellent way of growing your wealth over time.

If you're interested in maximising your chances of walking away from the stock market after a highly lucrative investing career (and show me someone who isn't), I strongly encourage you to read this special report penned by the experts at the Motley Fool. It's absolutely FREE to you, our Foolish reader.

Click here for your copy without obligation.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.