Renold 

I can currently buy shares in industrial chain supplier Renold (LSE: RNO) for just nine times earnings. That already looks a potential bargain given that the company’s customers are nicely diversified by sector and geography. However, this minnow also has a PEG (price/earnings-to-growth) ratio of 0.5. As a rule of thumb, anything at or below 1.0 tends to imply value based on that firm’s prospects. 

Recent results go some way to supporting this. Earlier this month, the company announced that it was continuing to see a recovery in revenues and orders following the pandemic. The latter rose 61.3% to almost £80m over the four months to the end of July. As such, RNO now predicts it will beat market expectations for full-year adjusted operating profit. 

This is not to say that an investment in this penny share is risk-free. The “much-lengthened supply chains” and “considerable raw material and transport cost inflation” mentioned in the last update could get worse before they get better. Even so, I reckon Renold is a cautious buy for my portfolio today.

Severfield

Severfield (LSE: SFR) produces about 300,000 tonnes of fabricated steelwork a year from its five UK sites and factory in India. This is eventually used in the construction of landmark buildings, stadiums, warehouses, hospitals and universities. London’s Shard and Wimbledon’s No.1 Court are examples. 

Right now, I can buy the shares for 11 times earnings. That compares favourably to valuations both within its industry and the market as a whole. The company also has a PEG ratio of just under 1.0. 

Then again, it’s worth me bearing in mind that demand for Severfield’s steel will clearly be linked to the overall health of the UK economy. It’s also worth noting that this has been a penny share for over nine years now. As such, I doubt this stock will fly anytime soon.

Still, it does offer a secure and decent dividend yield (3.7%). So, as a way of balancing out my more racy growth plays, Severfield appeals to me. 

Gem Diamonds

Diamond explorer and producer Gem Diamonds (LSE: GEMD) is a final penny share that, using traditional valuation measures, looks dirt cheap. It has a price-to-earnings (P/E) ratio of less than six for the current year. Other things I like are the net cash position and 3.8% dividend yield.

Then again, this low valuation isn’t a complete surprise. After all, any company in the mining sector has the potential to be highly volatile in price due to the cost and difficulty of extracting whatever metal or mineral it’s focused on. This is potentially compounded by where in the world drilling is taking place.

To be fair, GEMD digs in Botswana and Lesotho, which are considered to be generally safe. However, other risks include the growing popularity of synthetic diamonds among younger buyers.

So, while I like some of what I see here, I’m content to leave Gem Diamonds to those with stronger stomachs.

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In good health

There are several reasons why I think Assura (LSE: AGR) could be a great stock for me to buy today. Its role as a provider of primary healthcare property means it operates in one of Britains most defensive sectors. As a result I don’t have to worry too much about the impact of economic downturns on my investment returns.

I also like this penny stock because demand for healthcare facilities should receive a large bump as Britain’s population rapidly ages. And finally, Assura continues to expand swiftly to make the most of this large opportunity (it added an extra 12 properties to its portfolio in the three months to June, taking the total to 610).

It’s true that changing government policy surrounding the usage and funding of the NHS could hit Assura hard. Still, all things considered, I believe the long-term outlook for this UK share remains ultra-attractive.

An irresistible UK mining share?

Gem Diamonds (LSE: GEMD) is another penny stock that’s caught my eye due to its excellent value, on paper. City analysts think earnings here will rise 19% in 2021. This results in a forward price-to-earnings (P/E) ratio of just 6 times. The kicker too, is that right now the diamond digger boasts a meaty 4.1% dividend yield.

The number of millionaires and billionaires is tipped to keep ballooning during the 2020s. This means that some believe Gem Diamonds is poised to deliver strong and sustained profits growth as demand for its product skyrockets.

I’m not so convinced however, primarily because demand for synthetic diamonds is booming at the expense of naturally-occurring stones. According to Mordor Intelligence, demand in the lab-grown rock market will rise at a compound annual growth rate of 7% between now and 2026.

A better dirt-cheap penny stock

For this reason I’d much rather spend my hard-earned cash on trims, zips and threads manufacturer Coats Group (LSE: COA). Business is booming here as the gradual easing of Covid-19 lockdowns boosts clothing sales (organic revenue was up 34% in the first half versus the corresponding 2020 period). But I think this penny stock isn’t just a great buy for the post-pandemic recovery.

Coats is one of the leading manufacturers of threads on the planet. Consequently it’s in great shape to exploit rising clothing demand that’s driven by relentless population growth and booming wealth levels in emerging markets.

I think it’s a great buy despite the threat that rising consumer concerns around sustainability poses to the fast fashion segment. This could naturally have severe ramifications for sales of the company’s product. That said, at current prices Coats trades on a PEG ratio of just 0.1.

At these sort of prices I think it could prove a very shrewd investment for me.

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With these two British companies, I think I’ve found all of the above and more. They may not be household names. But I’ve learned that brilliant cheap UK shares come in all shapes and sizes. 

These two have £100m+ market caps. So they are not tiny minnows, but they’re also not slow-moving behemoths either. I think there’s enough value, quality, and growth potential here to double my money.

A note on cheap UK shares

Buying companies that have low price to free cash flow (P/FCF) ratios is important to me as an investor. It’s a metric favoured by legendary ‘Big Short’ investor Michael Burry.  A low P/FCF tells me I have spotted a business generating ample cash that’s not yet been reflected in the share price. Free cash flow is the money a company has left over each year to pay off debts and pay out to shareholders. That could be in the form of dividends, share buybacks, or improving long-term value by expanding operations.  

Driving growth

Let’s talk about Vertu Motors (LSE:VTU). It produced revenue of £2.5bn last year, and yet has a market cap of only £171m. It also just upgraded its profit forecast to £30m for 2021 thanks to an “exceptional used car market”. Vertu operates a network of car dealerships across the country and added 30 new outlets over the past year and a half.

A forward P/E of 7 makes these extremely cheap UK shares. 

Operating profit growth jumped 92% in the last 12 months. The shares are up about 50% in that time, but I think there’s a lot further to go. Earnings are expected to jump another 24% next year and Vertu shares are slated for a tidy 3.3% dividend yield. P/FCF is just 2.9. 

Covid-19 remains a risk, and the global shortage of semiconductors could hurt new car production. 

Shining bright

Gem Diamonds (LSE: GEMD) produced operating profit growth of 42% in the last 12 months from its African diamond mining operations. That’s impressive enough. But revenues are also expected to jump from $190m to $220m by the end of this year. And dividends have returned after four years of nothing from 2016 to 2019. So I know these cheap UK shares are generating plenty of cash to hand back to shareholders. P/FCF is only 3. 

Shares have lifted 155% in the last year, from 28p to 77p. But that doesn’t mean all the growth potential is already gone. The shares are trading on a P/E ratio of just 7, making them super cheap UK shares today. And Gem has been lucky. 

In May 2021 it announced it found two huge white diamonds: one 254 carats and the other 370 carats, from its Letseng mine in Lesotho. It’s considered to be the highest-carat diamond mine in the world. 

15 years ago the GEMD share price was 93% higher than today. The 2008 financial crisis saw diamond prices crash, and Gem’s share price with it. Demand for diamonds falls in economically shaky times. But now prices are rising. And the outlook appears much better for these luxury goods. 

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 Should I buy these UK reopening stocks for my ISA in May?

One of my FTSE 100 favourites

Associated British Foods (LSE: ABF) would be an attractive UK share to buy during any usual economic recovery. But I think the FTSE 100 stock is a particularly great company to buy this time around. Why? Well I think clothing spending is likely to be particularly high following the end of Covid-19 restrictions. This bodes well for this reopening stock’s fast fashion Primark division.

News of huge queues forming outside its storefronts have been plastered all over the papers recently as people have sought to glam up and refresh their wardrobes as they hit the town (and the workplace) again. Indeed, Primark enjoyed record weekly sales in England and Wales during the seven days to 12 April. I think ABF is a great pick for long-term share investors as the business seeks to expand its presence on foreign shores. But bear in mind that rising concerns over sustainability could cause profits growth to disappoint if consumers begin to turn their backs on fast fashion.

Man-made threats

I don’t think Gem Diamonds (LSE: GEMD) is an attractive reopening stock to buy today, however. That’s even though consumer spending is likely to receive a jolt. Buying UK mining shares requires a healthy tolerance of risk as a variety of exploration and production problems can unexpectedly occur. However, in the case of this company I’m chiefly concerned by the soaring popularity of lab-grown diamonds and how this will damage long-term profit. Today Pandora, the world’s biggest jewellery chain, said it will no longer sell mined stones on ethical and environmental concerns. It will sell artificial diamonds only, a move that could be replicated by other major chains before too long.

A better UK reopening stock

I’d be happier buying Wizz Air (LSE: WIZZ) shares for my Stocks and Shares ISA today. Of course this reopening stock also carries its fair share of risks today as Covid-19 infection rates remain buoyant in large parts of Europe. still, I think this UK share has a much brighter long-term future than Gem Diamonds. Firstly, the low-cost airline segment is expected to drive the recovery in the broader aviation sector. Secondly, this particular operator has significant exposure to Central and Eastern European emerging markets, regions where travel spending is growing strongly. Things are also looking up in the shorter term, too, with European Union lawmakers proposing plans to permit inbound travel under certain conditions. It’s possible that the continent’s airways could be buzzing again in a matter of weeks.

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Both diamonds and gold have eternal appeal thanks to their immense sentimental qualities. There have also been products launched in recent years that allow investors to buy a package of investment-grade polished diamonds as an alternative to cash or other flight-to-safety assets.

But before you rush off to research diamond firms, think twice. A quick look at stones prices suggests that the sparklers are anything but a trusted lifeboat in troubled times. According to the RapNet Diamond Index, values of one-carat pieces dropped 6.8% in March as coronavirus fears rattled buyer appetite.

Compare this to gold’s price ascent over the recent months. The yellow metal touched fresh seven-year peaks around $1,750 per ounce earlier this week. And some are tipping new record peaks above $2,000 in the months ahead.

Locked down

The recent global lockdown has delivered a hammerblow to diamond prices. Travel restrictions have hampered stone auctions and the processing of polished product, particularly so in the manufacturing hotbed of India.

Market conditions are likely to remain tough even when Covid-19-related quarantine measures are eased. Sales of diamonds in key markets like the US and China have been in the toilet for the past couple of years. It’s a result of tense trade talks between the two countries that have worsened the global economic slowdown. With a pandemic-related recession just around the corner, it’s likely that demand from these critical territories will sink still further.

There’s another reason why diamond prices have performed much more weakly than gold. Natural diamonds have come under intense attack from the synthetic stone segment in recent years. Technological developments mean that the quality of lab-grown products have improved markedly. Gold, meanwhile, has no artificial rival to try and bat away.

Cheap for a reason

Despite this cloudy outlook, diamond digger Gem Diamonds (LSE: GEMD) has witnessed some healthy dip buying of its shares in April. It’s a trend that has lifted the small-cap back above the recent all-time lows around 27p hit in March. Prices of 34p were last reported.

It’s likely that Gem Diamonds’ cheapness could attract even more buyers in the days ahead. At recent values, it commands a forward price-to-earnings (P/E) ratio of 8 times. Buyer beware, though: the multitude of market troubles mean it trades at low cost for a very good reason.

No safe haven

The company, which produces stones in the southern African nation of Lethoso, made $7.8m from its latest tender in March. This was down a shocking 18% from what it realised at the last small diamond sales event in December.

Gem Diamonds is also facing troubles on the operational front. It was forced to shutter its Letšeng mine for an initial three weeks following advice from the government there. News that it is to remain closed during the Q1 update on Tuesday (April 21) could sink its share price once more, as could scary commentary on the weak diamond market. I think this alleged safe-haven stock should be avoided at all costs.

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The diamond market is swimming in an abundance of supply, thanks to rampant production in recent years and a slump in demand even more recently.

It’s not that shiny stones are falling out of fashion. Rather, it’s slowing economic growth in key markets such as the US and China that’s playing havoc with sales right now. And the geopolitical and macroeconomic environment means tough market conditions are likely to persist in 2020, and possibly beyond.

Stones strain

My fears were worsened following Gem Diamonds’ latest trading update this week. In it, the small-cap declared rough diamond sales of 25,631 carats in the three months to September were down 10% from the same quarter last year. What’s more, the mining play achieved an average of $1,417 per carat, 6% less than it sold its stones for last time around.

“Prices for smaller and commercial type goods remain under pressure with polished inventory levels remaining high,” Gem Diamonds noted, adding that “larger high-quality diamonds have also experienced some price pressures in 2019.”

Reflecting these market troubles, the business said it now expects to sell between 111,000 and 113,000 carats this year, down from its March guidance of between 115,000 and 119,000.

It wasn’t a shock to see the digger’s share price slip to fresh record lows around 60p in the wake of the release. The share price has slumped by more than two-thirds over the past 12 months alone, and despite Gem Diamonds’ insistence this week that “a recovery in [smaller and commercial] prices is expected in the medium term,” it seems as if the market is running out of patience.

Between a rock and a hard place

It’s not just the possibility of weak stones prices extending beyond 2020. Alongside that aforementioned slowdown in the global economy, there’s also the stratospheric rise of cheaper, lab-grown diamonds which are damaging demand for naturally-occurring diamonds.

The rapid deterioration in Gem Diamonds’ balance sheet is also causing alarm to investors. As of June, the business had cash on hand of $25.8m, almost half on levels seen just six months earlier.

Lord knows what the mining giant’s bank account will look like at the end of 2019, though news this week it was cutting it’s full-year capex budget (to between $11m and $13m from its previous target of between $18m and $20m) hardly inspires confidence.

City consensus suggests Gem Diamonds will print a 60% earnings drop in 2019 and it’s difficult to see the company bouncing back into growth any time soon.

So forget about its dirt-cheap valuation (a forward P/E ratio of 10.2 times) and avoid it like the plague.

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Gold plus cash

Centamin, whose assets are in Egypt, is a stock I think is well worth considering. I reckon it’s good to have some exposure to gold in a diversified portfolio, as it can provide a bit of stability in times of trouble.

ETFS Physical Gold, which simply tracks the price of gold, less a small annual management charge, is one stock I’d be happy to buy today. However, Centamin offers something you don’t get from the metal itself. Those valuable cash dividends I mentioned earlier. I think this reward more than offsets the business risk and a share price that tends to be more volatile than the gold price, due to miners being largely a geared play on the metal.

In addition to its appealing dividend yield, I reckon Centamin’s price-to-earnings (P/E) ratio and price-to-earnings growth (PEG) ratio, based on earnings projections for 2019, are attractive at a current share price of around 100p. With 25% earnings growth forecast for the year, the P/E is an undemanding 12.7 and the PEG is 0.5, which is well to the ‘good value’ side of the PEG ‘fair value’ marker of one. As such, I’d be happy to buy this stock today.

Valuable diamonds

Gem Diamonds is a smaller company. Its market capitalisation of £153m at a share price of 110p (up around 2% on the back of this morning’s results) compares with Centamin’s £1.2bn. Nevertheless, might it be wise to split an investment between the two stocks?

Gem has recovered 13 diamonds greater than 100 carats from its Letšeng mine in Lesotho (southern Africa) so far this year, which already surpasses its previous highest number of these recoveries in a single calendar year. Ongoing technical improvements at the mine have improved recoveries and there should be more to come with the company set to commission a plant for the early detection of large diamonds and diamond damage reduction in Q2 2019.

In view of this, I’m not sure why City analysts are forecasting a decline in earnings in 2019. Perhaps 2018 is viewed as a one-off bumper year. However, even on the reduced earnings forecast, Gem’s P/E is a very cheap-looking 7.7. Furthermore, management has been focused on improving cash flows and with the board having a policy “to pay a dividend to shareholders when the financial position of the company permits,” analysts are forecasting a payout in 2019, albeit at a token level at this stage.

Due to the prospect of improving shareholder returns, including in the tangible form of cash dividends, and the benefit not only of reducing company-specific risk, but also diversifying geopolitical risk, I would lean towards splitting my investment. And at their current valuations, both stocks look very buyable to me.

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Improving performance

Reporting on Wednesday was precious metals mining company Gem Diamonds (LSE: GEMD). Its half-year performance was relatively strong, with revenue rising by 81% to $167.7m, while underlying EBITDA (earnings before interest, tax, depreciation and amortisation) increased from $13m last year to $68.4m in the first half of the current year.

The company has experienced relatively strong operating conditions. Its business transformation is also moving along as planned, and this is expected to contribute to a rise in earnings of 280% in the current financial year. Although its medium-term prospects may be volatile, Gem Diamonds’ price-to-earnings (P/E) ratio of 6 suggests that it offers good value for money and may therefore be able to deliver capital growth.

The company has scope to further improve its productivity and efficiency over the next few years. Together with the potential for strong global economic growth, this could lead to an impressive financial performance over the medium term.

Income opportunity

The income investing potential of Rio Tinto (LSE: RIO) continues to be relatively impressive. The company has enjoyed robust demand for iron ore in recent years, with stable demand from China being a major part of its improved financial performance. With the world economy performing well and Chinese demand for steel continuing to be high, this trend may continue over the next few years.

Rio Tinto’s dividend yield of 5.9% indicates that as well as a high income return, the stock may be undervalued. It continues to have a competitive advantage versus peers when it comes to costs, and this could provide it with greater resilience should operating conditions change.

With the company’s dividend being covered around 1.7 times by profit, it seems to have a sustainable income outlook even if iron ore prices fall. And with a P/E ratio of around 11, it appears to offer a wide margin of safety.

Improving business

The performance of Anglo American (LSE: AAL) could also be relatively impressive over the long run. The company has been able to restructure in recent years, with asset disposals helping it to concentrate on core operations. Alongside productivity and efficiency improvements, this has helped the company to deliver stronger financial performance in the last couple of years.

Clearly, there are risks ahead for Anglo American and its sector peers. The stronger US dollar could cause weaker demand for a range of commodities, and this could hurt investor sentiment. But with the stock having a P/E ratio of around 10, it seems to offer excellent value for money when its diversity and improved financial standing is considered.

While not the most stable stock in the index, the company appears to offer a sound risk/reward ratio. As such, it could be worth buying now for the long term.

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With that in mind, here are two shares which appear to be grossly undervalued given their financial forecasts.

Sound strategy

Reporting on Wednesday was Gem Diamonds (LSE: GEMD). The diamond miner reported that 2017 was a difficult year, with its profitability coming under pressure. However, it began to see the impact of changes made to its business model in the second half of the year. For example, there was a significant improvement in the recovery of large diamonds. And with prices continuing to be buoyant, the prospects for the business appear to be bright.

In addition, Gem Diamonds is aiming to become more efficient. The company is targeting the delivery of $100m in cost savings by the end of 2021. It will also seek to deliver $30m in cost savings a year after that date.

But looking ahead, the company is forecast to experience a volatile financial performance over the next two years. Clearly, its profitability is highly dependent on the underlying diamond market. However, with a price-to-earnings (P/E) ratio of around 7, the stock appears to be undervalued at present. While this suggests it’s unpopular among investors and may be a volatile investment, it could also prove to be a highly profitable purchase in the long run.

Upbeat outlook

Also offering the potential to generate high returns in the long term is gold miner Centamin (LSE: CEY). The company is expected to report a 38% rise in its current-year bottom line, with solid production levels and a firm gold price helping to boost its outlook.

Despite such a high rate of growth, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.4. This suggests it could generate further capital growth in the long run — even after rising by 160% in the last five years.

Certainly, the outlook for the gold price remains uncertain in the near term. Investors may become more bullish about the prospects for the global economy and this may lead to reduced demand for safer assets. However, the prospect of a period of higher inflation over the coming years remains likely and this could ultimately lead to more favourable trading conditions for Centamin and its peers.

As such, now could be the perfect time to buy. Alongside its capital growth potential, it may offer some defensive characteristics in case the recent volatility in share prices continue. This means that it could be a worthwhile addition to a mix of investor portfolios for the long run.

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I believe the price represents excellent value for money. And there’s a similar-sized company in a different industry that’s also trading far too cheaply, in my view.

World-class mine

Gem Diamonds owns 70% of the Letšeng mine in Lesotho, an enclaved country, completely surrounded by South Africa. The Lesotho government owns the other 30%. Letšeng produces large, top colour, exceptional white diamonds and is the highest dollar per carat kimberlite diamond mine in the world.

The company also owns 100% of a mine in Botswana. This mine, which produces commercial-quality diamonds of lower value and size, has been on care and maintenance for the past year, largely due to depressed prices in the market for diamonds of this class.

Sparkling growth prospects

Gem Diamonds reported a strong final quarter to 2017. It sold 31,476 carats during the period, up 21% from Q3, and achieved an average price 19% higher at $2,217 per carat. It ended the year with net cash of $1.4m compared with net debt of $11.8m at the end of Q3.

The momentum has continued into this year, with the company already having recovered five diamonds of greater than 100 carats, compared with eight in the whole of 2017. Chief executive Clifford Elphick said: “This is largely attributable to the ongoing technical improvements made at the Letšeng mine.”

Gem Diamonds is well run with a strong balance sheet and trades at less than 10 times forecast 2018 earnings of $0.14 a share (9.86p at current exchange rates). And with analysts having pencilled in growth of up to 50% for 2019, I rate the stock a ‘buy’.

Thriving business

Pawnbroking is one of the oldest businesses in the world. Its long history is testament to both its profitability and an enduring demand for its services. It’s the main business of H&T Group (LSE: HAT), which was founded in 1897 and floated on AIM in 2006. Now the UK’s leading pawnbroker, H&T has a market capitalisation of £131m at a share price of 350p.

This is another company that enjoyed a strong final quarter to 2017. So much so that chief executive John Nichols told us in an update last month: “We expect the full-year profit before tax to be above current market expectations.” The stock is trading at 12.3 times analysts’ upgraded earnings forecasts of 28.5p a share, while an expected dividend of 10.5p for the year gives a solid 3% yield.

H&T is thriving and with a retail operation and personal loans business growing alongside pawnbroking, the group is forecast to deliver annual double-digit earnings growth for the foreseeable future. My Foolish friend Roland Head bought the stock recently and it looks very buyable to my eye too.

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