With nearly 60,000 companies listed on the world’s stock markets, trying to find a value stock can be like hunting for a needle in a massive haystack.
But I didn’t have to look too hard to identify one share that I think currently offers excellent value.
My strategy for identifying undervalued companies is to look for stocks that have fallen significantly over the past three months. Large downwards price movements are usually triggered by bad news. But sometimes investors over-react and a company’s stock falls more than what I believe is justified. These are the shares that interest me the most.
Anglo American (LSE:AAL) is a good example. Its share price has fallen by over 30% during the past three months. Of all the members of the FTSE 100, only Ocado Group has performed worse. During this time, the company released its 2022 results and issued a trading update.
Volatile earnings
Last year the company recorded a profit of $4.5bn on revenue of $35.1bn. But investors were disappointed that earnings per share were $3.72 compared to an expected $4.68. However, 2023 has started well. Production for the first quarter is 9% higher than for the same period in 2022.
And the directors are expecting mining activity — and the associated costs — to be in line with previous estimates. Analysts are forecasting earnings for 2023 of $4.68 per share.
But commodity prices bounce around all over the place which makes accurately predicting profits difficult.
Goldman Sachs recently advised its clients to buy shares in miners as they are likely to benefit from rising prices, caused by increasing demand from China. However, a recent study found that mining stocks were the second-most volatile, behind those in the energy sector.
Current estimates suggest that the shares trade on a forward price-to-earnings (P/E) ratio of 7.7. Of the six miners in the FTSE 100, this is bettered only by Glencore. But Anglo American has recorded a higher pre-tax profit than its larger rival during each of the past four years.
Last year, the company declared a dividend of $1.98 per share. Based on current exchange rates, and assuming this level of payout is repeated this year, the shares are presently yielding an attractive 6.7%.
Dirty or dirt cheap?
Not everyone is comfortable buying shares in mining companies. The over-extraction of natural resources and the resulting environmental damage is not acceptable to some.
But the company’s activities are not illegal. And nickel and copper — which accounted for $3bn of the group’s 2022 EBITDA (earnings before interest, tax, depreciation, and amortisation) — are essential for a successful transition to cleaner technologies.
I bought Anglo American shares when they were much higher. At the time, I thought they were good value. A few months later, I believe they are even more of a bargain. The shares were last trading at current levels in early 2021.
In my view, the recent share price fall is unjustified. If I had some spare cash I’d be looking to include more of the stock in my portfolio.
