All the selling in the market over the past few weeks has left us with some severely undervalued firms. Now, as investors we need to be careful. Some businesses have seen a sharp fall in their price for good reasons. Think airlines and other travel firms that will take a devastating revenues hit for 2020 due to the fallout from the coronavirus and travel restrictions. I would steer clear of companies in this sector.
On the flip side, there are some firms that have a lower share price without such obvious reasons. And I think some of these can provide good long-term upside for investors.
One share I would recommend holding, or buying if you do not own it already, is Auto Trader (LSE: AUTO). This is an online marketplace to buy and sell new and used cars. Like most constituents of the FTSE 100 index, it has seen a share price fall of almost 24% over the past month. But is this warranted?
Financial results from 2019 were very strong. Numbers were up across the board, from revenue (+8%) to operating profit (+10%). Even with the disruption seen in early 2020 so far, I am not overly concerned about its prospects. The market for used cars is fairly inelastic, and the actual searching and information-gathering for a car can be done by consumers at home.
Given the strong financial performance for the past few years, the fundamental business of Auto Trader is strong. With low physical overheads due to its online presence, and a lack of capital tied up in actual cars, the business has the ability to see out a tough start to the year. Through buying this dip in the share price, I think investors could be well rewarded into the second half of 2020 and beyond.
Time for a drink
The second big name I would consider at the moment is Diageo (LSE: DGE). The multinational drinks owner might not be the first company you might expect me to choose. Won’t the firm be impacted by the global supply chain disruption? Yes, very likely. But the element that makes Diageo a lower-risk buy than some other international firms is that it is well-diversified. This is the case geographically, but also across market segments and demographics.
It also has a basket of powerful and desirable brand names that have proved popular in good times and bad. Think Johnnie Walker, Baileys, Smirnoff, Gordon’s, Guinness and more.
Further, the company is already being proactive regarding the impact from the coronavirus. It has recently announced a likely hit of £200m to profits this year, due to the virus lockdown. This is being priced-in to the share price, which is down 21% over the past month. Investors are now aware of this hit to profit, so it will not be a surprise when it happens.
With bad news priced-in to the share, any revision with better news could be a catalyst for the share price to rally. When you consider that in the last fiscal year profit was up 9.5% to almost £4bn, it is certainty not a business where long-term demand is falling.
Jonathan Smith does not own shares in any firm mentioned. The Motley Fool UK has recommended Auto Trader and Diageo. 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.