3 value stocks I’d buy after recent declines

Rupert Hargreaves looks at three value stocks that could be too cheap to pass up after recent declines, and that offer market-leading dividends.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As stock markets have plunged, a handful of high-quality businesses have suddenly become value stocks.

As such, now could be an excellent time for long-term investors to snap up some shares in these highly attractive operations at discount prices.

Value stocks on offer

Drax Group (LSE: DRX) is currently one of the market’s most unloved value stocks. Shares in the power plant operator are dealing at a price-to-earnings (P/E) multiple of 6. The stock also commands a price-to-book (P/B) ratio of 0.5.

Should you invest £1,000 in National Express right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if National Express made the list?

See the 6 stocks

Value stocks are usually defined as those businesses trading at a discount to book value. It looks as if Drax falls into this bracket.

The question is, does the company deserve this valuation?

It does not seem as if it does. Even in the worst-case economic scenario, the UK will still need electricity, and Drax is one of the country’s largest power plant operators. This suggests that the business will continue to earn revenues no matter how bad the coronavirus outbreak becomes.

On top of the stock’s attractive valuation, the company also offers investors a dividend yield of 8.3%. Therefore, investors will be paid to wait for market confidence to return and the stock to recover.

With electricity demand only growing across the UK, investors might not have to wait for long.

Pubic transport

National Express (LSE: NEX) is one of the most efficient public transport operators in Europe and North America. Last year the business reported an operating profit margin of 8.8% compared to the sector average of 7.8%.

Unfortunately, it’s highly likely that the coronavirus outbreak will hurt the company’s operations. However, public transport is an essential service for many people, and demand is only growing as more and more consumers ditch private cars over environmental concerns.

As such, National Express looks well-positioned to stage a strong recovery when the outbreak dies down, and economic activity returns to normal.

Today investors can buy into this recovery play for just 9.2 times forward earnings. The stock also offers a dividend yield of 5.2%. The payout is covered twice by earnings per share, so it looks quite safe for the time being.

These metrics, and National Express’s position in the public transport industry, make it one of the most attractive value stocks on the market today.

Online delivery

High street sales may suffer as consumers stay home to avoid the virus outbreak, but initial indications suggest online sales could grow. Next (LSE: NXT) could benefit from this trend.

While the company does still have a significant high street presence, around half of the group’s sales now come from its online business.

What’s more, this business is highly cash generative. Management has been returning a large chunk of this cash to investors with dividends and share buybacks.

Not only does Next reward its shareholders more than many of its peers, but the company’s healthy profit margins and cash flows means the firm is well-positioned to weather the storm.

Many of its peers might not be so lucky. That could help the company come out on top when the economy recovers. Next could use its size and scale to grab market share from struggling smaller peers.

Therefore, it could be worth buying a share of this high-quality business after recent declines.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares in Next. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

1 key stock market indicator to watch this week

The US Index of Consumer Sentiment is a key leading stock market indicator. And UK investors might want to pay…

Read more »

Edinburgh Cityscape with fireworks over The Castle and Balmoral Clock Tower
Investing Articles

I’m on the hunt for cheap shares to buy this January! Here’s one I found

Christopher Ruane has been looking at the UK stock market to try and find shares to buy for his portfolio.…

Read more »

Investing Articles

4 SIPP mistakes I’m avoiding like the plague!

Christopher Ruane explains four errors he is trying hard to avoid in investing his SIPP, as he tries to maximise…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Up 28% in a month, I’ve been loading up on this penny share  

Our writer has been buying more of a penny share he already holds and reckons recent news could point to…

Read more »

Investing Articles

How to aim for a reliable 6% dividend yield when picking stocks

Mark Hartley outlines his strategy to identify top-quality stocks with high dividend yields and strong fundamentals for consistent income.

Read more »

Investing Articles

Investing £20,000 in this FTSE 250 stock today could net investors £1,944 in passive income this year

After falling 11% in a week, this FTSE 250 company is set to return almost 10% of the its market…

Read more »

Investing Articles

I asked ChatGPT to name the best S&P 500 growth stock and it picked this AI powerhouse

Muhammad Cheema asked ChatGPT to pick its top S&P 500 growth stock. He was disappointed with its response, which missed…

Read more »

Investing Articles

£10k in savings? Here’s how an investor could use that to target £420 of passive income a month

Harvey Jones shows how it’s possible to build a high and rising passive income from a portfolio of FTSE 100…

Read more »