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Why I believe these former market darlings could offer amazing value today

Investors who brought shares in Just Group (LSE: JUST) at the beginning of 2018 are now sitting on paper losses of nearly 50%. The company isn’t really to blame for this tragic performance. Possible regulatory action has sent investors running for the hills as the underlying business continues to underperform. 

Indeed, today the company, which provides services to help retirees manage their finances, reported a 40% year-on-year increase in retirement product sales for the nine months to the end of September. This includes a 32% increase in so-called lifetime mortgage (LTM) sales, which are facing scrutiny from regulators. 

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Regulators are worried that the sales of these products present a risk to the financial system because of the way they are structured. They let a homeowner borrow money against the value of their house as a form of annuity. Capital is only due for repayment when the homeowner dies. The company that sold the LTM can then sell the home to recoup the funds. These products are particularly lucrative for providers, but they have a sting. If the house used for security falls in value, the provider has to take a loss. 

Regulators are worried that in the event of a housing market downturn, losses on these products could spiral, sending shockwaves across the financial sector as companies try to balance the books. As a result, it had been speculated that Just would be forced to raise nearly £500m to protect its balance sheet — indicating a rights issue equivalent to roughly half the group’s market cap. 

While we still don’t know what action regulators will require Just and its peers to take, a recent announcement revealed the implementation date for the final proposals would not be before 31 December 2019. This should give Just “greater flexibility to execute any necessary capital management actions.” 

With some of the uncertainty surrounding LTM products now lifted, I think Just could be an interesting ‘buy’ after recent declines. With the shares changing hands for just 5.6 times forward earnings and 0.5 times book value, there’s already plenty of bad news baked into the stock and a wide margin of safety for investors. 

Still Trying

At the beginning of this month, I picked out homebuilder Galliford Try (LSE: GFRD) as my top stock for October. While the shares have struggled to gain traction after my recommendation, I’m still optimistic about the outlook for the group. 

Even though the outlook for the UK’s homebuilding sector is darkening (as proven by the recent profit warning from peer Crest Nicholson), I’m confident that Galliford remains a ‘buy’. The bargain-basement valuation is the main reason why I’m attracted to the business. Right now, the stock is changing hands for only 6.4 times forward earnings, which is, in my view, a steal. The rest of the homebuilding sector is trading at a median P/E of 8.1. There is also a dividend yield of 8% on offer, covered twice by earnings per share. A yield at this level usually indicates dividend stress. However, a recent fundraising has shored up the firm’s balance sheet, so I believe the risk of a dividend cut in the near term is low. 

So, if you’re looking for a cheap income stock, with exposure to the UK’s undersupplied housing market, Galliford ticks all the boxes for me. 

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Rupert Hargreaves owns no share 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.

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