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Are you tempted by the 35% fall in the Saga share price? Here’s what you need to know

After falling by 35% in the last year, Saga (LSE: SAGA) faces a difficult near-term outlook. Its financial prospects appear to be downbeat, while investor sentiment could remain weak. This could equate a period of volatility for the company’s shares.

However, it’s share price may now be dirt-cheap. It has a price-to-earnings (P/E) ratio of around 11, which is relatively low at a time when the FTSE 100 is trading close to a record high. As such, it could be worth buying alongside another stock that reported a positive update on Tuesday and which could offer excellent value for money.

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Improving outlook

The company in question is Paragon Banking (LSE: PAG). It released an encouraging trading update ahead of its 30 September year end. It has performed in line with previous guidance while making progress on growing its retail deposit base. It now exceeds £5bn, and the performance suggests that it could grow further in the medium term.

The company’s buy-to-let pipeline at the end of the financial year is expected to be 25% above the level reported last year. This is set to support lending volumes into the next financial year. With around 90% of application flows coming from professional landlords, the prospects for the business may be more resilient than for some industry peers.

Looking ahead, Paragon is forecast to report a rise in earnings of 9% in the current year, followed by further growth of 14% next year. Despite this, it has a forward P/E ratio of around 11, which suggests that it offers a wide margin of safety. As such, now could be the perfect time to buy it for the long term.

Growth potential

Similarly, Saga’s share price performance could improve in future. Although the company’s performance in the current year is set to be below previous expectations, with its bottom line due to fall by 5%, the scale of the decline in its share price in recent months seems excessive. That’s especially the case when the business is forecast to report a rise in earnings of 2% in the next financial year.

With Saga having a dividend yield of around 7% from a payout which is covered 1.5 times by profit, its income investing prospects appear to be bright. They could attract investors to the stock, which could have a positive impact on its share price.

Ultimately, the company faces a period of change and uncertainty. Fundamentally, it appears to be sound, with a strong position in its core markets and a relatively loyal customer base. Therefore, for value investors who take a long-term view of their portfolios, it could be a worthwhile buy. It has the potential to return to its level from one year ago, although it may take a number of years for it to do so. In the meantime, its dividend yield could keep its returns relatively high.

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Peter Stephens owns shares of Saga. 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.

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