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My top 2 value stocks for 2018

Life is increasingly difficult for value investors. With the stock market trading near record highs, value opportunities are hard to come by since multiples tend to be higher for the vast majority of stocks.

However, despite the generally expensive market, there are still some attractive low P/E stocks available if you’re willing to look hard enough. And one FTSE 100 stock out there which seems to fit the bill is housebuilder Taylor Wimpey (LSE: TW).

Rout in property stocks

Like many other housebuilders, shares in Taylor Wimpey were hard hit by this week’s rout in property-related stocks. Business has boomed for the housebuilders, but there’s growing concern that we’re approaching the cyclical top of the property market.

An update from Taylor Wimpey on Wednesday did little to calm investor nerves, as although the group continued to report an increase in housing completions and a rise in average selling prices, its order book fell from £1,682m in 2016 to £1,629m in 2017. This fall was seen by some analysts as an early warning sign that market conditions have turned.

However, the company disagreed and reassured investors that buyer demand remained strong. It also said the dip in its forward order book was instead due to the timings of its developments.

Fundamentals intact

Looking ahead, I reckon there’s still room for further growth as the long-term fundamentals remain firmly intact. Notwithstanding political and economic uncertainty, the chronic shortage of affordable housing supply means many more new homes will need to be built to meet demand. The government recognises this and has proposed changes to planning laws, which could support future volume growth for housebuilders.

Moreover, valuations are undemanding, with the company well placed to grow medium-term earnings as it ramps up the pace of new constructions. City analysts are predicting underlying earnings growth to accelerate to 10% this year, up from forecast growth of 7% for 2017, which indicates the stock trades at just 10 times its expected earnings this year.

Turnaround play

Another value stock to watch out for is public transport operator Stagecoach (LSE: SGC).

Its outlook has improved somewhat since my last look at the company, with recent management action delivering positive progress for its UK bus networks and the company set to secure a positive outcome from the negotiation of new terms for its East Coast rail franchise.

Profits have so far held up better than expected, with adjusted earnings per share down just 2% to 13.6p in the six months to 28 October. Still, there’s plenty of room for further improvement. Independent research shows the firm continues to offer lower than average bus fares than the industry, which underscores its greater opportunity to raise fares in comparison to its rivals.

Possible re-rating

As such, I believe there’s scope for a positive earnings surprise from upcoming earnings announcements this year. A re-rating of the stock is also possible if this happens, with the stock currently heavily discounted on its recent woes.

With this in mind, I reckon more of the risk is on the upside for Stagecoach. The stock currently trades at a mere 8.4 times its expected earnings this year, and offers a prospective dividend yield of 7.2%.

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Jack Tang has a position in Taylor Wimpey plc. The Motley Fool UK has recommended Stagecoach. 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.