When it comes to investing for the long term, I think buying shares that are out of favour, or industries that investors currently don’t like, is a sound strategy. Brexit and wider economic concerns are hitting some industries harder than others right now, including housebuilders (which I think near universally look cheap right now) and car sellers. For environmental reasons, companies involved in the production of plastic also seem to be underperforming in terms of share price rises.
Losing horsepower
Inchcape (LSE: INCH) is a global car seller and distributor, operating in 32 markets. The business model talks about it having a strong global position, which includes developed and emerging markets, how it has longstanding relationships with the car manufacturers (OEMs in the industry jargon), its distinct routes to market and diversified revenue streams.
The most recent results showed the business is struggling profitability-wise, although revenues did nudge up by 2.4% and basic earnings per share (EPS) rose 5.3%. Investors will have been pleased to see the dividend held flat rather than slashed, indicating the business is confident that conditions will improve. I’m inclined to agree that once Brexit uncertainty passes, the share price can recover from its current position and car buying will pick up.
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The upside of investors generally disliking the car industry is that the shares in the companies become cheap. This has the possible additional attraction of making the companies more appealing as takeovers to overseas buyers, which is often good for shareholders – just ask those that own Greene King. The pub giant and brewer is being bought by Hong Kong’s CKA and the offer price was a 51% premium to the share price on the day the deal was announced. Even without a takeover though, good companies trading at a cheap valuation present an opportunity for long-term investors. Inchcape certainly looks cheap to me with a P/E of under nine.
Looking undervalued
Besides having a great name, packaging company Smurfit Kappa (LSE: SKG) has a lot to offer investors – especially those prepared to wait patiently and invest for retirement. Despite a succession of positive trading updates, the share price has been falling, which makes it look undervalued in my opinion. The share price over the last 12 months fell by 26% whereas the FTSE 100 over the same timeframe has declined by around 7%.
In the first half ending 30 June, the packaging maker said EBITDA rose by 17% and operating profit before exceptional items rose 5%. Return on capital employed also rose 0.6% to 18.7%. This followed a Q1 result where revenue rose 7% to €2.3bn as the company said it was confident of another year of progress. It also reported an earnings before interest, tax, depreciation and amortisation margin of 18.3% during the period.
A move to more sustainable packaging, expanding in markets such as Bulgaria, Colombia and Serbia, and the resolution of a competition investigation in Italy all, I think, play into the hands of Smurfit and in time will boost the share price.
Packaging is going to continue to be an important industry for many years to come because of e-commerce and I think companies in the industry (and especially Smurfit Kappa) are looking cheap right now and so make for good long-term investments.
