I’ve been scouting for undervalued shares to add to my portfolio. There are a couple of business that appear to me to be so cheap, I think it would be a mistake to pass them up.
Undervalued shares on offer
I should start by saying that just because I believe these companies are undervalued, it does not mean they will generate positive returns.
Buying stocks at depressed prices can be a good investment strategy, but it is not suitable for all investors. However, I’m comfortable with the level of risk involved. That’s why I follow the strategy.
The first company on my list of undervalued shares is N Brown (LSE: BWNG).
Thanks to its online business, this fashion company is projected to escape the worst of the pandemic. According to City projections, net income totalled £27m in 2020 and could rise to £30m in 2021. These projections put the stock on a forward price-to-earnings (P/E) multiple of 7.6. I think that looks cheap compared to the market average of 16. Of course, analysts’ forecasts can change as events develop.
Some investors might believe this company is cheap for a reason. The fashion industry is incredibly competitive, and just because N Brown has survived until this point does not mean that it will continue to do so.
Still, I think the stock’s valuation outweighs the risks of investing. That’s why I would buy it for my portfolio of undervalued shares.
Recovery play
I would also buy shares in H&T (LSE: HAT) for my recovery portfolio of undervalued shares.
The company, which offers a range of services such as gold purchasing, pawnbroking, personal loans, and retail shops, has experienced steady growth over the past five years.
Revenues declined last year as non-essential retailers were closed, but I think that could change as we advance. Indeed, the City is expecting revenues to return to near 2019 levels by 2022. These are just projections at this stage.
Nevertheless, I’m encouraged by the company’s growth track record. It also entered the pandemic with a robust and debt-free balance sheet, which has enabled it to weather the storm. It will also provide financing for the group after the crisis to fund expansion. At the end of 2020, the firm had £35m of net cash to support its customer lending business and provide capital for reinvestment.
The main risk the company faces today is the potential for a clampdown on its lending activities. A large number of high-interest lenders have collapsed over the past few years as regulators have taken a hard line with these businesses. H&T will not be immune to regulatory action. A sudden fall in the gold price may also reduce demand for its gold buying service. Profits at this service jumped 19.3% to £6.8m last year.
Even after taking these challenges into account, I would buy the stock for my portfolio of undervalued shares. I believe it has great potential in the years ahead.
