The Motley Fool

Why I think the Santander share price could be the bargain of the year

Buying share prices when they are low and selling them when they are high is an obvious route to investment success. Putting it into practice, though, is generally far more challenging than it seems in theory. One reason for this is that when shares are cheap, as the Santander (LSE: BNC) share price seems to be at the present time, there’s a risk there could be further near-term falls.

However, with the bank appearing to offer growth potential as well as a high degree of diversification, it could offer improving performance in the long run. Alongside another good value share that reported an encouraging update on Wednesday, it could be worth buying today.

Improving performance

The other company in question is home furnishings retailer Dunelm (LSE: DNLM). Its third quarter trading update showed it’s making good progress in expanding its online and omnichannel retailing performance. Like-for-like (LFL) sales growth was 12.5%, with its LFL growth in stores rising by 9.8% at a time when many UK-focused retailers are experiencing challenging operating conditions.

Furthermore, there was an increase in the company’s gross margin of 90 basis points. Improved sourcing and the closure of dilutive Worldstores businesses were the key reasons for this, with the company expecting there to be a further improvement in profitability in the final quarter of the year.

Since Dunelm is forecast to post a rise in earnings of 7% in the current year, it seems to be performing well at a time when it’s making major changes to its business model. With consumers continuing to go online for a variety of products, the trend towards omnichannel retailing could suit the business. Therefore, trading on a price-to-earnings growth (PEG) ratio of 1.9, it could offer good value for money.

Low valuation

As mentioned, the Santander share price appears to be cheap at present. It trades on a PEG ratio of only 0.9, which suggests that it has a wide margin of safety. This is largely due to the poor performance of the bank’s shares over the last few years, declining 34% over the last five years.

The problem facing investors is that it’s difficult to catch a falling knife. There has been little evidence to suggest that investors are becoming more positive about the prospects for the stock over recent months, with it continuing to lag the FTSE 100 even as the index has moved higher.

Therefore, there’s a risk that buying Santander now could mean that an investor experiences paper losses in the short run. In the long run, though, the bank’s position within a wide range of markets could mean it offers greater diversity than many of its sector peers, while it may be able to benefit from the continued positive growth rate of the global economy.

As such, since it trades on a low valuation, the stock could be attractive at the present time. There may be some short-term pain ahead, but its dividend yield of 6.2% and recovery potential over the long run could mean it becomes increasingly appealing to value investors.

Stock-Market Millionaire

Full of Foolish wisdom, the free Special Free Report “10 Steps To Making A Million In The Market” lays out what we consider vital advice that can help create a possible £1 million portfolio!

Take Step 6, for instance - Harness The Full Power Of Reinvested Dividends. While these cash payments may initially be small in relation to the capital value of the investment, reinvesting them into yet more shares can dramatically enhance your portfolio’s return!

To see the jaw-dropping example we use to back up our case, as well as access to the remaining nine steps, click here to get your copy free of charge.

Peter Stephens 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.