Finding the market’s most undervalued stocks can be a difficult task. You need to be prepared to make a trade-off between value and quality and pay more for higher quality stocks. Just because an equity is cheap does not mean it is worth buying.
It does not actually matter what price a stock is. It is deemed expensive or cheap by investing valuations and an analysis of the underlying fundamentals.
So how do you find a truly ‘cheap’ stock” To help you on your way, here are three UK equities for around £5 that all seem to be undervalued.
Dart Group (LSE: DTG) shares trade at 520p and City analysts are expecting earnings per share of 49p for the fiscal year ending 31 March 2017, down 19% year-on-year. As earnings per share are expected to fall this year, the market has placed a valuation of 10.4 times forward earnings on Dart’s shares.
This valuation may seem appropriate, but over the past five years, its earnings per share have grown just under 300%, from 16p to 61p. After this explosive growth, Dart’s upward curve is expected to take a breather over the next two years, with earnings per share falling back to 39.4p for the fiscal year ending 31 March 2018. However in the year after, growth of 14% is expected.
Based on current projections, even at its lowest point over the next two years, shares in Dart will continue to trade at a forward P/E of less than 13, an attractive multiple worth paying for a company with such a stellar record of growth.
I believe Carillion (LSE: CLLN) is one of the most undervalued companies in the UK today. The construction services group has reported steady growth over the past five years. Pre-tax profit has grown from £165m to £181m, although over the same period earnings per share have declined by around 15%. Still, over the next three years City analysts expect earnings per share to tick higher by 4%.
Ok, you may say that this is hardly anything to get excited about. But when you consider the fact that the shares trade at a forward P/E of 6.6 and support a dividend yield of 8.3% with the payout covered twice by earnings per share, Carillion looks extremely attractive as an investment.
At 481p, shares in Redrow (LSE: RDW) are affordable for most investors and the underlying valuation of the business is also attractive. Shares in the company trade at a forward P/E of 7.5 an City analysts are forecasting earnings per share growth of 12% for the fiscal year ending 30 June.
Over the past five years, the firm has increased earnings per share by 470%, and recently management rewarded shareholders by hiking the company’s dividend payout by 40%. The shares currently support a dividend yield of 2.9%.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Redrow. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.