The Motley Fool

These ignored value stocks could help you retire early

Pockets of value can often be found in unlikely places in the stock market. Today I’m going to look at two companies whose sectors are out of favour, but which seem to be trading well. Both stocks look fairly cheap to me. Should value investors take a closer look?

Baked-in profits

Like-for-like sales edged 0.3% higher to £314.3m last year at cake and bakery foodservice company Finsbury Food Group (LSE: FIF). The firm confirmed this morning that profits for the year ended 2 July are expected to be in line with market expectations, despite fairly tough trading conditions.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

This AIM-listed group has a market cap of just £151m, but is a fairly high-quality business in my view. The group’s return on capital employed — a useful measure of profitability — rose from a historical average of about 10% to 14.5% in 2016. Operating margin edged above 5%, a respectable achievement for a business of this kind.

A further attraction is that unlike some sector rivals, Finsbury appears to have a fairly strong balance sheet. Net debt was £21m at the end of December. That’s equivalent to a net debt-to-EBITDA ratio of just 0.8, well below the two times threshold that’s generally considered to be a risk level.

So what could go wrong? The biggest risk for a business of this kind is that profit margins will be continually squeezed. Customers tend to demand lower prices, while raw ingredient and wage inflation can push up costs. One current problem mentioned by management in today’s update is the price of butter, which has doubled over the last year.

However, the group says it is having “productive discussions” with customers regarding the recovery of these extra costs. Finsbury shares edged lower after today’s news. But with the stock trading on a forecast P/E of 11 and offering a well-covered forecast dividend yield of 2.6%, I think this baker could be worth considering.

A star player

Many of the biggest names in the retail sector are struggling in the face of internet competition. One surprising exception to this is electronics group Dixons Carphone (LSE: DC).

Although you might expect the firm’s profits to be under pressure from low-cost online sellers, this doesn’t seem to be a big problem. The group’s latest results revealed that like-for-like sales rose by 4% last year, while adjusted pre-tax profit rose by 10% to £501m.

However, this apparently strong performance was flattered by £28m of one-off gains relating to lower-than-expected costs on long-term customer support contracts. In reality, I think it’s probably fair to say that underlying pre-tax profit rose by about 4% — in line with sales growth.

Although this may not seem so impressive, I think it’s a pretty solid performance in the current environment. The group’s 4% operating margin isn’t anything to be ashamed about either, and debt levels remain very low.

The market doesn’t seem to agree with my positive view on this firm. Dixons’ share price has fallen by 14% since its results were published on 28 June. That’s left the stock trading on a 2017/18 forecast P/E of just 7.7, with a potential dividend yield of 4.4%.

In my view, this downbeat valuation could be a buying opportunity for contrarian investors.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.