6 CHEAP STOCKS IN AN EX­PEN­SIVE MAR­KET

WE USE THREE METH­ODS TO SPOT RARE POCK­ETS OF VALUE

Shares - - FRONT PAGE -

Stock mar­kets across the globe are mark­ing new highs as in­vestors con­tinue to focus more on how fast earn­ings are grow­ing rather than how these earn­ings are be­ing val­ued.

‘Growth’ and ‘value’ in­vest­ing are typ­i­cally seen as be­ing in op­po­si­tion to each other and growth is on a win­ning streak. The US Rus­sell 1000 Value In­dex has re­turned 9.7% in 2017 against 24% for the US Rus­sell 1000 Growth In­dex. That trend is be­ing repli­cated on this side of the At­lantic too.

Hedge fund man­ager David Ein­horn – a noted value in­vestor – has even ques­tioned if there is a ‘new paradigm for valu­ing equities’. In a let­ter to clients of his Green­light Cap­i­tal fund, re­ported by

Bloomberg, he wrote: ‘The per­sis­tence of this dy­namic leads to ques­tions re­gard­ing whether value in­vest­ing is a vi­able strat­egy.’

AJ Bell’s in­vest­ment direc­tor Russ Mould says one fund man­ager re­cently moaned to him that there is no value in mo­men­tum stocks at present – and no mo­men­tum in value stocks.

We’re in a dif­fi­cult time for mar­kets de­spite the head­line in­dices rac­ing ahead. Nev­er­the­less keep read­ing as we do have some good news.

EX­PEN­SIVE MAR­KETS ARE MAK­ING IT TRICKY TO FIND VALUE

HOW TO FIND VALUE

Value in­vest­ing may be out of fash­ion but Shares still be­lieves in con­sid­er­ing val­u­a­tion when it comes to judg­ing an in­vest­ment.

Just look at the fate of leisure group Mer­lin

En­ter­tain­ments (MERL) which fell nearly 20% in the wake of a re­cent profit warn­ing (17 Oct). The news un­der­mined its growth cre­den­tials and shined an un­favourable light on its high price-toearn­ings (PE) ra­tio in ex­cess of 20-times.

In­vest­ing in un­der­val­ued com­pa­nies pro­vides what is of­ten de­scribed as a ‘mar­gin of safety’ which can help you avoid those kinds of sharp losses.

Ex­pen­sive mar­kets are mak­ing it tricky to find value – but it is not im­pos­si­ble.

Data from Cap­i­tal Eco­nom­ics sug­gests the FTSE All-Share is trad­ing at around a 50% pre­mium to its long-run av­er­age PE ra­tio; and the US S&P 500 trades on an earn­ings mul­ti­ple of 17.9 against a 10year av­er­age of 14.1.

Buried within the mar­ket is a pocket of value stocks. To find them, we’ve de­cided to look beyond the stan­dard PE fig­ure and use a range of al­ter­na­tive met­rics. We’ve ac­cessed three fil­ters of­fered by Stock­o­pe­dia’s screen­ing ser­vice partly in­spired by the pro­cesses de­ployed by leg­endary in­vestors.

Recog­nis­ing a stock can be cheap for a rea­son; we have also ap­plied the knowl­edge of the Shares team to fil­ter out the bad stuff and ar­rived at a list of six stocks which we be­lieve offer win­ning value.

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