With the stock market trading near an all-time high, it’s tough to find bargains in today’s market. However, not all stocks have recorded gains as high as others, and I think I’ve found three shares that seem deeply undervalued.
Strong order backlog
Shares in oil services company Petrofac (LSE: PFC) seem too cheap to ignore, with a forward P/E of 9.4 and a dividend yield of 6.2%.
Unlike many in the sector, Petrofac is attractively positioned due to its heavy exposure to the Middle East, where the relatively low costs of production in the region have shielded the company from savage cuts to capital spending in the oil & gas industry. What’s more, the company has adapted to lower energy prices by scaling back its Integrated Energy Services (IES) operations, which has helped to reduce its exposures to production risks.
As you might have guessed, Petrofac’s transformation isn’t without its difficulties. The company has made a number of writedowns and impairments, which resulted in it declaring a net loss of $349m in 2016. However, with cash flow from operations improving and steady revenue from new projects, Petrofac is delivering a strong operational performance across all its businesses and net debt is falling.
Additionally, Petrofac’s order backlog, which stands at $14.3bn (roughly double last year’s revenues), remains one of the most robust in the industry and gives it excellent revenue visibility over the next few years.
Housebuilder Redrow (LSE: RDW) may not be as well known as its larger rivals, but the company has been one of the most resilient in the sector since the Brexit vote last June. Shares in Redrow are currently trading near a post-recession high of 499p a share but they still seem undervalued.
Redrow is seeing business boom, thanks to a resilient residential property market in the South East and an increase in legal completions. In the six months to 31 December 2016, earnings per share (EPS) surged 35% to 31p a share. But City analysts expect earnings for the full-year to climb just 14% this year. This indicates that the market may be overly cautious on the stock, which opens up the possibility of earnings revisions over the next six months.
But even on those current estimates Redrow seems cheap, with shares trading at a forward P/E of just 7.5, which compares favourably to the sector average of 9.2.
First dividend payment?
Meanwhile, challenger bank Aldermore (LSE: ALD) seems poised to make its first dividend payment this year. The specialist mortgage and small business lender generated capital organically for the first time, and it has more capital than it needs to fund its growing loan book.
Looking ahead, Aldermore sees good tailwinds, with the bank expecting regulatory change to benefit smaller lenders and steady growth in buy-to-let lending. City analysts currently forecast its bottom line to have increased by 12% in 2016, with further growth of 11% expected for this year.
This gives it a forward P/E of just 8.2, which seems to offer excellent value for money for a stock which is soon to start making dividend payments. As such, I consider Aldermore a worthy buy at today’s price of 230p a share.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. 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.