07 Jan 3 top value stocks I’d buy in 2018
Value investing — that is, buying companies you believe the market is currently ignoring or being unnecessarily harsh on — has fallen out of favour in recent years thanks to investors’ penchant for pursuing high-growth (and highly-priced) stocks. Nevertheless, history tells us that snapping up bargains and holding them for the long term is a proven strategy for getting rich.
With this in mind, here are three businesses trading on what appear to be very reasonable valuations that I’d be tempted to buy in 2018.
Still going cheap
Shares in £3.2bn cap food ingredients supplier Tate and Lyle (LSE: TATE) ended 2017 around the 700p mark — pretty much the same price they were 12 months earlier. That’s despite the company stating in November that it had lifted its full-year profit expectations following a “strong first-half performance“.
Beyond recent trading, further reasons for considering Tate include the 4.2% yield it offers (rising to 4.3% in the next financial year) and a gradually reducing debt burden. Free cashflow also looks a lot healthier than it did a few years ago.
Sure, the size of the company means Tate’s share price is unlikely to gallop any time soon. As a relatively cheap source of income (the shares trade on under 14 times earnings) however, I think there are a lot worse options out there.
I last looked at FTSE 100 big-hitter International Consolidated Airlines (LSE: IAG) — owner of British Airways and Iberia – back in October. Even today, the company still presents as a cracking value pick, trading as it does on just 7 times earnings for its new financial year (which began on January 1). The £14bn cap also boasts a PEG ratio of under 1, suggesting that it should also have appeal for those looking to buy growth at a reasonable price.
Like Tate, IAG offers an attractive dividend yield of almost 4%. The fact that payouts are also easily covered by profits (which have increased every year since 2013) should mean there’s little chance of these being cut in the near future. Notwithstanding its status as an undeniably cyclical stock, one might also argue that IAG benefits from being somewhat removed from the budget airline dogfight between listed companies like easyJet, Ryanair and Wizz Air.
Mid-cap contracts for differences (CFDs) provider Plus 500 (LSE: PLUS) rounds off my trio of top value opportunities.
Despite the hugely encouraging performance over the last year — over which time the shares soared almost 200% — I still think the company is worthy of attention, particularly as it continues to trade on an appealing price-to-earnings (P/E) ratio of under 10 for 2018.
Last week’s trading update featured news of record quarterly revenues, rising customer numbers and perhaps inevitable interest in its cryptocurrency offering. Given this, it’s perhaps not surprising to learn that management is now confident of profits for the full year being ahead of market expectations. When combined with its huge — and growing — net cash position, high operating margins and consistently superb returns on the capital it invests, Plus 500 remains highly attractive.
While there’s no knowing how long recent performance can continue, the old stock market adage of running your winners feels apt here. Even if the shares do stutter in 2018 as some investors take profits or markets correct, the stonking forecast yield of 6% for the new financial year is surely adequate compensation for holders who choose to remain.
Achieve financial freedom
So long as time is on your side, buying quality companies on the cheap (and doing very little else) can be an excellent way of growing your money and eventually achieving financial independence.
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Paul Summers has no position in any of the shares mentioned. 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.