As we head into 2023, I’m hunting for bargain shares to buy. Today I want to look at the three cheapest stocks in the FTSE 250, based on 2023 earnings forecasts.
Tullow Oil: recovery potential?
Shares in Africa-focused exploration and production company Tullow Oil (LSE: TLW) have fallen by more than 25% in 2022, despite soaring oil and gas prices. That’s left the stock trading on a 2023 forecast price-to-earnings (P/E) ratio of less than two.
One reason for this may be that the company has delivered a run of disappointing drilling results this year. A plan to merge with FTSE 250 peer Capricorn Energy has also failed.
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Merging with cash-rich Capricorn would have cut Tullow’s debts. Without this deal, net debt is expected to be $1.9bn at the end of the year.
Indeed, my sums suggest that when Tullow’s net debt is added to its market cap (a common valuation technique), Tullow’s current valuation is roughly the same as that of FTSE 100 giant Shell.
Unlike Shell, Tullow needs to stay focused on debt repayment and isn’t expected to pay a dividend.
Admittedly, Tullow has some good assets and could attract a private buyer. African oil baron Samuel Dossou-Aworet owns nearly 18% of the company and has been rumoured as a potential bidder.
These shares could offer value at current levels, but given the uncertain longer-term outlook, I’d look for companies with less debt and a nice dividend.
Just in time
Life insurance firm Just Group isn’t all that well known among investors. But I think this specialist business could be attractively valued, now that it’s completed a difficult restructuring period.
Just expects its second-half results to be strong. The company said in August that the outlook for 2023 was “very positive”. Despite this, the shares are trading more than 50% below their net asset value of 172p per share.
The main risk I can see is that this is a complex business that’s difficult for outsiders to analyse. It’s not easy to predict the impact of rising interest rates and changing regulations on future profits.
However, I’ve been following Just’s transformation for a while. I think the group is making good progress. With the shares trading on just four times forecast earnings, I think this FTSE 250 stock looks a decent buy for 2023.
8% yield from gas producer?
Energy group Energean (LSE: ENOG) is focused on gas production in the Mediterranean, off the coast of Israel. The group’s flagship Karish project is now ramping up. Karish is expected to produce 6.5m cubic metres of gas per year, when it becomes fully operational.
Broker forecasts are bullish and suggest that revenue will reach $937m in 2022, rising to $2,259m in 2023. Profits are expected to hit $860m next year, putting the stock on a P/E ratio of 3.1.
If things go to plan, analysts expect the shares to provide an 8% dividend yield next year.
Energean is a relatively new arrival to the UK market and the firm carries more than $2bn of debt. If profits fall below expectations, debt repayments might become a concern.
Things look good to me at the moment, but I can see some risks here. I’d view this as a possible speculative pick for 2023.
