One of the main things about value shares is the underlying businesses tend to be troubled, at least temporarily. And they rarely come with a rosy outlook – which is often why they look cheap.
But skilful investors can do well picking value shares if they’ve been driven down too far by the market. Indeed, valuations can re-rate higher. And that’s especially true if conditions in the business begin to improve.
Sometimes share price gains can be worth the wait. But it’s equally possible to pick a cheap-looking share that struggles to recover. Or, even worse, the stock may sink lower despite looking like a bargain the whole time.
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Hospitality
I think several stocks are worth further consideration and deeper research right now. For example, managed restaurants and pubs operator Mitchells and Butlers looks cheap on a couple of indicators.
With the share price near 164p, the price-to-tangible book value is around 0.45. And the price-to-sales ratio is about 0.43.
However, the company carries a lot of debt. And that could become problematic if trading in the business turns down.
There’s a history of volatile earnings showing the business is at the mercy of swings in the general economic cycle. But that can work both ways and drive the share price higher if earnings gain traction in the years ahead.
Meanwhile, January’s first-quarter trading update contained some strong figures. And I’d describe the outlook statement as optimistic but cautious.
Building products
Ibstock makes clay and concrete building products. And with the share price just above 168p, the forward-looking price-to-earnings multiple is a little under 11 for 2024.
However, the main attraction is the dividend. City analysts anticipate a yield of just under 5% for next year.
But the firm’s financial and trading record shows multi-year volatility for both earnings and the dividend. And that betrays the cyclicality in the business, which adds risks for investors.
On 8 March, the company posted a decent set of figures for 2022. But the directors said activity in the early weeks of 2023 was weaker. And that followed “more cautious” demand in the fourth quarter of 2022.
Commodities
M.P. Evans (LSE: MPE) is a UK-based company that owns, manages, and develops sustainable oil-palm estates in Indonesia.
The main attraction for this stock is the forward-looking dividend yielding just over 5% for 2024. And with the share price near 860p, the anticipated earnings multiple is just above nine for next year.
Those figures combine with a price-to-tangible book value of around 1.2 to make the overall valuation look undemanding.
Meanwhile, revenue and the dividends have performed well over several years. But the business has a volatile earnings record.
And the main risks include the vulnerability of crops to destructive natural events and fluctuating palm oil prices. However, the company has managed to achieve a net cash position on its balance sheet rather than net debt. And the business has been growing organically and via acquisitions.
There are opportunities and threats for these three businesses. And a positive investment outcome isn’t guaranteed. Nevertheless, they are each worthy of further and deeper research for investors willing to take a long-term view of their prospects.
