Value stocks have handily outperformed growth equities over the last 18 months or so. Yet I think these two shares — one small and the other of mega-cap proportions — remain deeply undervalued. I’d buy both today.
Epwin Group
Epwin Group (LSE: EPWN) is a small-cap stock capitalised at just £111m. The West Midlands-based group is a vertically-integrated manufacturer of energy efficient and low-maintenance building products.
These include high-quality PVC windows and doors, cladding, guttering, decking and prefabricated building components. It supplies these products to the repair, maintenance and improvement, new build and social housing sectors.
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Obviously, the UK housing market is going through a correction at present, and the risk is things could get worse from here. Epwin’s sales could take a hit, depending on how long this slump lasts.
However, this risk is already reflected in the share price, which is down 36% in 18 months.
This leaves the shares trading on a dirt-cheap price-to-earnings (P/E) multiple of 8.2. And investors are rewarded with a dividend yield of 5.8% for taking on the risk.
Despite a shaky housing market, last year’s profits were in line with expectations and trading has been robust so far in 2023. Analyst consensus for this year is for over £360m in sales, around £20m in profits, and a dividend of 5.0p per share.
With the shares currently at 77p, that would represent a yield of 6.3%.
Longer term, millions of new houses will need to be built in the UK, and they’ll all need kitting out. This should underpin rising profits at Epwin. That’s why I’m adding this value stock to my own portfolio soon.
Alphabet
It seems strange to be associating deep-value status to tech juggernaut Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). The parent company of Google and YouTube has historically traded at a premium to the rest of the US stock market. Until now, that is.
Today, the search giant sports a P/E of 19.8. On a forward-looking basis, that could drop to around 17. That means the stock is currently the cheapest it’s ever been.
Of course, the stock is cheap because there are risks here. The firm is facing well-documented competition from artificial intelligence (AI) chatbot ChatGPT. And a cyclical slowdown in digital advertising isn’t helping.
But the company is a pioneer in this space, having developed (but not released) its own AI chatbot technology years ago. So I fully expect it to incorporate its own generative AI into all of its main products, possibly within weeks.
Its Google Cloud business delivered 32% year-on-year revenue growth in Q4. In 2022, cloud revenue amounted to over $26bn, accounting for around 9% of group revenue.
Sales from its Pixel phones are growing, and a Pixel Watch was launched last year. Plus, there are future initiatives like self-driving vehicle technology and quantum computing. These aren’t priced into the stock today — but could be one day if either project is successful.
The company remains a free cash flow-generating machine. It had over $113bn in cash, cash equivalents, and marketable securities at the end of 2022. This gives it an enviable position to fund its ‘Other Bets’.
I think talk about the end of its dominant competitive position is premature. That’s why I recently snapped up some shares.
