3 bargain shares for your portfolio
Could these shares see a rerating this year?
This year is proving a difficult one for investors, with stock markets reeling from the effects of the Ukrainian war, inflation and a possible looming recession - although the FTSE 100 has remained relatively resilient.
However, one benefit of the worldwide stock markets rout is that, on the flip side, bargains can sometimes be picked up. Over the longer term, these unloved company shares can receive a rerating as the stock market recovers or corporate profits and fortunes revive.
Here are three company shares we think look undervalued right now.
Marks & Spencer in better shape
Shares in Marks & Spencer have lost nearly half their value since January – tumbling from a high of around 260p to 143.85p as the market turmoil, the war in the Ukraine and concerns about rampant inflation have hit home.
The retailer has been in turnaround mode for some time, but now looks to be in better shape for the challenges ahead. Its legacy poorly performing stores have been closed and the company is now focused on well-located sites, with its 10 new stores performing 11% better than expected.
At the recent full-year results, pre-tax profits for the full-year rose by 30% compared to 2019/2020, while group turnover increased by 6.9% to £10.9 billion. International online sales more than doubled to £250 million, compared with £100 million in 2019/2020, while clothing sales increased by 3.8%. Marks & Spencer also enjoyed strong Christmas trading this year, while M&S food grew sales by 10.1%.
While revenues from the Ocado venture dipped by 4% as basket sizes normalised following the pandemic, the company believes the business has the potential to grow by 50%. M&S' balance sheet is also stronger now that net debt was also reduced last year by £1 billion to £420 million.
Meanwhile, outgoing chief executive Steve Rowe has handed over the reins to existing management Steve Machin, Kate Bickerstaffe and Eoin Tonge as part of a pre-existing succession plan. Machin becomes CEO, Bickerstaffe is appointed co-CEO, while Tonge is now chief strategy and finance officer.
Admittedly, Rowe says that the profit base will remain low for 2022/2023 due to inflationary pressures. However, the retailer looks more resilient and well placed for difficult times. Analysts at Berenberg bank, who have a buy rating on the shares, recently cut their price target to 198p from 215p. Nevertheless, this still leaves plenty of potential upside. At 143.85p, Marks & Spencer shares are worth buying for the long term.
Lloyds Banking – strongly positioned
Lloyds Banking Group is on its way back in from the cold after a difficult few years. During this time it was under majority government ownership, following the 2008 banking crisis and had to set aside millions in compensation for a fraud investigation at its HBOS division.
Earlier this year, analysts at broker Credit Suisse featured the bank in a list of 15 defensive share picks they believe will prove resilient to issues, such as the war in the Ukraine and inflation. Analysts there highlighted its strong pricing power and limited exposure to Eastern Europe.
Lloyds already pays a generous dividend but is also returning £2 billion to shareholders this year via a share buyback scheme.The shares have been creeping up since the strong first-quarter results, unveiled in April, when the bank increased its guidance for the full-year. Management now expects the banking net interest margin to come in above 270 basis points, while return on tangible equity is anticipated to be greater than 11%.
However, there is still plenty of upside potential. Lloyds is likely to benefit from the Bank of England’s interest rate hikes, while the housing market continues to be strong, despite concerns about a looming recession. It owns Halifax, which is the UK’s largest mortgage lender. Analysts at JP Morgan Chase recently set a price target on the shares of 60p. It's always a risk that mortgage customers could default. However, at 43.44p, the shares are worth investing in.
S4 Capital ripe for a re-rating
Sometimes good companies make mistakes. Few come more embarrassing than when, earlier this year, marketing firm S4 Capital postponed its results due to auditing delays. Sir Martin Sorrell, who chairs the company, told investors that the delay was “unacceptable” and “embarrassing”. Nevertheless, it’s thought that the issues were minor, although they obviously hit investor confidence, as the shares slid 34% in value.
Last year the company all but doubled in size, half by acquisition and half through organic growth. Recent full-year figures were encouraging, with sales doubling to £686.6 million (from £342.7 million in 2020) and billings also doubling to £1.3 billion.
However, S4 Capital made a £55.7 million loss for 2021, compared with a pre-tax profit of £3.1 million the previous year, due to acquisition costs.
Sir Martin’s plan is to double gross profit or net income organically over the next three years. S4 Capital boasts clients including Meta, Alphabet – owner of Google – BMW and HP and is establishing content revenue streams in areas such as cryptocurrencies, NFTs and the metaverse.
Although tough financial times present a challenge, Sir Martin predicts that 2022 will be a strong one for the company and that its clients are well-positioned. Recent first-quarter results were also strong, with revenues up 70%.
The shares have performed poorly this year, down 60% to 248.2p. However, at these levels they are worth buying in the hope of a rerating.
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*Based on revenue excluding FX (published financial statements, June 2020).
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