A value stock is one that’s perceived to be undervalued in the short term versus the long-term ‘fair’ value. Trying to exactly pin down how a stock is undervalued can be hard though. One of the most commonly used metrics for value is the price-to-earnings (P/E) ratio. I use a figure of 10 as a benchmark for fair value. Here are two ideas both currently below this mark.
Not much of a gamble
The first company is Playtech (LSE:PTECH). It’s the world’s largest supplier of online gaming and sports betting software. Over the past year, the stock has fallen by 26%, pushing the P/E ratio down to 8.87.
I think the business is in a great place right now and has managed to buck the weaker industry trend of betting demand in the UK this year. This was shown by the comment in the H1 2023 report that the firm had “delivered our highest ever Adjusted EBITDA in the first half of 2023.”
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One element that is helping Playtech to ride out weakness in some markets is the diversified operations it has throughout Europe and America. The US is an area of high growth right now and Playtech is taking full advantage. Revenue for this region in H1 2023 was up 43% versus the same period last year.
At the same time, the P/E ratio indicates to me that this stock is cheap. I think investors are shying away from it due to concerns about the UK gambling market. Further, an ongoing legal dispute with a Mexican business isn’t giving the firm good public relations. These are potential risks going forward. But I still believe too much pessimism is factored in to the current share price.
Ready for the next bull market?
Next up is Plus500 (LSE:PLUS). The FTSE 250 stock is one of the largest retail trading and investing platforms in the world, serving many different markets around the globe.
The P/E ratio sits at just 4.55, with the stock down 23% over the past year. Interestingly, back in 2015 Playtech tried to buy Plus500, but it never got regulatory approval.
The business has struggled over the past year in part due to the unpredictability of financial markets. Concerns around stock and bond markets have made some retail customers decide to simply sit on their hands and do nothing.
Therefore, it doesn’t surprise me much that profit before tax for H1 2023 was $174.9m, versus $312.6m from H1 2022. The risk is that this poor run continues.
This has made the stock cheap, in my opinion. Investor sentiment should return at some point, especially when interest rates begin to fall and a future stock market bull run starts.
Due to acquisitions (such as in Japan) over the past year, when the next market rally happens Plus500 should be very well placed to grow revenue. I think investors should consider adding both companies to their portfolios.
