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3 top value stocks I’d buy in 2019

My three FTSE 100 value picks for 2019 all trade on forecast 12-month price-to-earnings (P/E) ratios well below the index’s long-term historical average of 14. They also sport dividends near or above the Footsie’s current forward 4.9% yield.

Certainly, there are some stocks around with lower P/Es and higher dividends. However, I believe the risk/reward balance of my chosen three makes them more attractive investments than those that appear cheaper on paper.

The three stocks I’d buy today for their value credentials are budget airline easyJet  (LSE: EZJ), software giant Micro Focus International  (LSE: MCRO) and packaging group DS Smith  (LSE: SMDS). To begin with, the table below summarises some of the key numbers that helped these stocks catch my eye.

  52-week high share price (p) Current share price (p) Fall in share price (%) Forecast 12-month P/E Forecast 12-month dividend yield (%)
easyJet 1,796 1,293 28 10.8 4.8
Micro Focus 2,196 1,493 32 9.0 5.6
DS Smith 539 321 40 8.5 5.3

The FTSE 100 index is down 14% from its 52-week high. As you can see, the share prices of my three value picks have fallen double that or more. As a result, their P/Es have come down to very cheap levels and their dividend yields have risen to chunky heights.

Furthermore, it’s worth noting that their prospective dividends are well covered by their forecast earnings. In the case of easyJet and Micro Focus, cover is a whisker below two times, while DS Smith’s is 2.2 times. These robust levels of cover suggest all three companies’ dividends are relatively safe.

Mere turbulence

easyJet’s strong network, brand and management make it a terrific business, in my view. And I believe the weakness of its share price in recent months has presented a great opportunity, for investors to buy a stake.

Both the EU and the UK have committed to ensure that flights between the two territories will continue in the event of a no-deal Brexit. And easyJet said in a trading update last week that it’s “well prepared” for a 29 March divorce date. I think investors could return to the stock in increasing numbers in the coming months.

Working through challenges

Micro Focus suffered severe indigestion after swallowing the software assets of Hewlett Packard Enterprise in a reverse takeover in September 2017. Integration proved more challenging than expected and by last summer the company said it was running about a year behind plan.

Such setbacks aren’t entirely unusual in this kind of major merger, but it’s also often the case that the company gets there in the end. I think this could prove to be the case with Micro Focus, after boardroom changes and an encouraging trading update in early November. Annual results are due on 14 February, and I’m hopeful they could be a catalyst for improved investor sentiment.

Pessimism more than priced in

Concerns about global economic growth and oversupply in the containerboard market appear to be behind the decline of DS Smith’s share price. However, I believe the current P/E of 8.5 reflects a far too pessimistic view of the company’s prospects.

For one thing, it offers a good margin of safety, if the high single-digit earnings growth forecast by City analysts turns out lower. And for another, as my colleague Royston Wild recently explained, in his in-depth article on the company, falls in containerboard prices in response to oversupply may not be as severe as many investors appear to be anticipating.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith and Micro Focus. 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.