Buying undervalued shares is one hugely profitable way to invest in the stock market. It’s a strategy that can help us buy when a share price is low meaning returns should be greater when the company’s value is realised by the market. Here are two stocks I think have huge potential and look great value right now.
Not plain sailing at Saga
Saga (LSE: SAGA) provides services including insurance and cruises to the over 50s. It is well positioned to take advantage of growing life expectancies and increased spending on experiences and leisure. Over the last 12 months though, the shares have taken a beating, falling around 38% at the time of writing.
What this means is that the shares now offer a yield near to 8% and a price-to-earnings ratio (P/E) below 10. The low P/E indicates the shares are lowly-valued which is ideal for those looking for a bargain that could potentially grow over time. But will it? Some City analysts think so, stating that the business is undervalued at the current share price. Saga is not sitting on its hands, it is spending heavily on marketing which should translate into better profitability. In part its current problems are due to competition and pricing in the cyclical motoring insurance market. When that market picks up again Saga will benefit.
Cheap stocks with huge potential are a bit of a sweet spot for many investors, including me. I think Saga is one of them. The dividend could be at risk if the business doesn’t improve but could well be a risk worth taking to get a slice of a business well positioned for future growth.
Brewing something special for investors?
Greene King (LSE: GNK) the pub owner and brewer is another FTSE 250 stock that’s been beaten up by investors over the last 12 months. Again, that puts it in a potential sweet spot, offering a high dividend yield at over 6.5% and also a low P/E at just under 8. The share price, which had jumped up to 642p in June, is back down at around 500p now.
New leadership of the company could provide the catalyst for future growth. This month, the CEO of 14 years called time on his leadership of the company. A successor is expected to be appointed early in 2019. Although Brexit seems to be weighing on this UK-focused company, there are reasons to be optimistic about Greene King’s prospects. One of these is that the company is starting to once again grow earnings and analysts have said the company is undervalued.
Also, the September trading statement showed that like-for-like sales were up 2.8% for the first 18 weeks of the year. Along with disposals, which should drive profitability and therefore protect the dividend, I think the business is getting itself into shape and trading and sales are improving.
For me, both Saga and Greene King are looking good value. The low P/E ratios of both alongside relatively high dividend yields provides a margin of safety for investors who buy the stocks. It may a bumpy ride for investors, as is always the case with out of favour or recovering companies, but thinking longer term, investors could be handsomely rewarded for backing these companies.
Andy Ross has no position in any of the 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.