The stock market’s taken a big hit in recent days. As a result, a lot of shares now look very cheap. Of course, not every ‘cheap’ stock is worth buying. But here are two I think are worth considering due to their long-term potential.
A future FTSE 250 star?
First up, we have Gamma Communications (LSE: GAMA). It’s a digital communications business that operates in the UK and Europe and has a strong growth track record (revenues have jumped 76% over the last five years).
Gamma shares are currently trading for about 1,175p – nearly 25% below where they were trading at the start of the year. At the current share price, the price-to-earnings (P/E) ratio here’s only 13, which strikes me as great value for this growth company.
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Looking beyond the low valuation, there are lots of reasons to be bullish here. One is that the company plans to move from the UK’s Alternative Investment Market (AIM) to the main market in May. This should make the stock eligible for the FTSE 250 index. Inclusion in this index would allow far more institutions to invest in the company.
Another reason is that the company’s raising its dividend aggressively (a 13% increase for 2024) and also doing share buybacks. So it’s rewarding investors with multiple forms of capital returns.
Of course, a recession across the UK and/or Europe is a risk here. This could lead businesses to reduce their spending on technological transformation. Taking a five-year view however, I think this stock will do well.
A tasty proposition at current levels
One stock that’s already in the FTSE 250, and looking very cheap, is Greggs (LSE: GRG). It operates one of the most popular food-on-the-go chains in the UK.
Back in early January, Greggs shares were trading for around 2,800. Today however, they’re about 40% lower at 1,685p.
At 2,800p, I didn’t see a lot of appeal as the valuation was quite lofty. At today’s share price it’s a different story though.
Currently, the P/E ratio here is only 13. Given Greggs’ strong brand name, high level of profitability, and solid growth track record, I think that multiple’s good value.
One thing I like about this company from an investment perspective is that it sells cheap food. This should provide an element of resilience if economic conditions deteriorate from here. Another is the dividend yield. After the recent share price fall, the yield has climbed to about 4%.
A risk factor here is costs. Looking ahead, the company’s likely to be facing higher staff wage costs due to the recent National Insurance (NI) changes.
All things considered though, I think the shares have a lot of potential at current levels, especially when the 4% yield’s factored into the equation.
