For decades, Warren Buffett – the investment oracle – has advocated buying stocks that have a margin of safety or, in other words, are valued attractively. In the current economic climate, it’s especially important that investors don’t overpay for stocks. Two stocks that I think are unusually cheap are Elegant Hotels Group (LSE: EHG) and Anglo American (LSE: AAL).
Elegant Hotels Group is an owner and operator of seven luxury hotels in Barbados. Whilst revenue has remained flat since the company’s IPO in 2015, operating profits have risen 58% to $14.1 million last year. In the first half of this year, after-tax profits were up by a whopping 34% from the same period in 2018. Compellingly, the corporation tax rate in Barbados has been reduced from 30% to between just 1% and 5.5%.
The group is committed to leveraging the strength of the brand to both increase sales and achieve savings. With 70% of bookings coming through tour operators, and less than 20% of customers coming from the USA, there is scope to improve direct to customer selling and to focus more on the US market.
EHG also continues to selectively refurbish its existing hotels, leading to higher average room rates and feeding through to the bottom line. In the medium to long term, the group’s strategy is to acquire underperforming hotels and to expand further into the Caribbean. Elegant Hotels Group has already won two management contracts – albeit one has recently been terminated – and this presents a more balance-sheet-friendly way for the group to expand its presence and improve its financials.
The shares trade on a P/E of around seven times last year’s earnings. Not only do I think this is cheap, but it also fails to reflect the future benefit from the reduced corporate tax rate, not to mention a hefty 5% dividend.
But the real value comes from the company’s discount to its net asset value. The reported net asset value of £101 million is over 60% greater than the market capitalisation implied by the current share price. Interestingly, the directors even believe that the real value of the group’s assets is in excess of that reported on the balance sheet.
Over at Anglo American, yearly revenues have grown by an average of 10% since 2015, whilst an after-tax loss of $5.8 billion has turned into a profit of $4.3 billion. Momentum has continued into the first half of 2019, with the miner reporting operating profits up 19% from the same period in 2018.
Anglo American is committed to increasing production and growing margins. The first-half operating margin was a huge 46%, with a target of 50% by 2023. Since 2012 productivity has doubled, whilst unit costs have fallen by 27%.
Not only does AAL pay a juicy 4.9% dividend at the time of writing, but management have also promised that up to £800 million will be returned to shareholders in the form of a share buyback, completed by no later than March of next year.
Just like EHG, the shares trade at a P/E of around seven times last year’s earnings, which doesn’t reflect future earnings growth. The current share price values the company at around the same level as its net asset value which, in my opinion, completely undervalues the impressive return that it generates on its capital.
