The stock market may have hit a record high recently, but it seems there are still bargains to be found.
Shares in some companies are even cheaper today, relative to their earnings, than they were at the worst moments of the financial crisis, research forTelegraph Money found.
The most popular measure of a share’s cheapness is the “price to earnings ratio”, or p/e – the share price divided by the amount of profit made by the company on a per-share basis.
When the stock market falls, p/e ratios fall as well, so an individual firm’s p/e is normally depressed when the market hits rock bottom, as it did six years ago. In retrospect, many of the p/e ratios available at the time were signalling that big bargains were available.
So, when a company is trading today on a ratio that’s even lower than it was six years ago, it could be a sign that the market has missed a buying opportunity.
Here we look at nine companies whose current p/e, based on analysts’ earnings forecasts, is below the level of six years ago. They were identified by SharePad, a new portfolio analysis tool.
We asked for expert advice on whether these shares were really bargains, or whether investors should ignore their attractive p/e.
Bellway
• p/e today: 9
• p/e in March 2009: 20.2
Housebuilder Bellway has the lowest p/e score of the shares identified by the screen, even though the share price has surged from 400p to £19 over the past six years as the sector benefited from Britain’s economic recovery.
As a result, the shares were not necessarily a bargain, analysts said. Six years ago earnings were at rock bottom, so the p/e ratio at the time was artificially inflated.
Stephen Williams, an analyst at Brewin Dolphin, the stockbroker, said Bellway had a lower p/e than other house builders but still ruled out putting the shares in the bargain category.
“It is cheap compared with its peers but this reflects the low dividend yield (3pc) and its lower return on capital employed,” Mr Williams said.
Centrica
• p/e today: 14.7
• p/e in March 2009: 78
Centrica, which owns British Gas, is viewed as cheap for all the wrong reasons.
Rising debts, falling profits and a dividend cut in February have driven the shares down (by 20pc over the past year) – and the p/e up.
Ian Forrest, an investment analyst at The Share Centre, said: “Investors should hold fire until the management team have outlined the results of the firm’s strategic review, which concludes at the end of July.
“The bad news is reflected in the valuation, which does look cheap, and the forecast yield, even after the dividend cut, of 4.7pc is certainly eye‑catching.”
GKN
• p/e today: 12.5
• p/e in March 2009: 20.6
The car and aerospace parts maker is another share whose p/e rating is viewed as having been artificially high in 2009 because its profits fell significantly during the recession.
Guy Ellison, of Investec Wealth & Investment, said he would want to investigate further to assess whether the shares were cheap. In this case, he said other valuation measures, such as the “price-to-book” (p/b) ratio, were a more useful guide.
This ratio looks at how a company’s market value compares with the value of its assets – its buildings, machinery and intangible assets – if they were sold today.
GKN’s p/b is 3.9. As the rule of thumb is that a score of 1 or less is “cheap”, GKN does not look like a bargain, Mr Ellison said.
Aberdeen Asset Management
• p/e today: 12.8
• p/e in March 2009: 16.7
This asset management giant is viewed as one the most “interesting names” on the list.
Russ Mould of AJ Bell, the fund shop, said: “Its relatively low p/e now, relative to its own history, may reflect the underperformance of emerging markets in the past two to three years, as the firm has a particular expertise here.
“But for long-term investors Aberdeen could be the pick of the stocks identified by the screen. We are all living longer, and relying on government largesse may not be wise, since the state’s finances are still fragile, so we’ll need to save more.”
He added: “With its wide range of funds and investment trusts the firm is well placed to capitalise upon this demographic trend.”
LSL Property Services
• p/e today: 11.1
• p/e in March 2009: 24.1
The estate agent and surveyor is another company that has bounced back strongly from the financial crisis, with the share price rising from a low of 40p to a peak of 480p last year.
But the shares have retreated sharply since, dipping to 385p this week, amid concerns over the sustainability of the housing market’s upturn.
Mr Mould said: “Given the recent share price dip, questions are now being asked about whether the upturn in the housing market will be stronger for longer or not. Investors who think it still has legs can now buy shares more cheaply.”
Amec Foster Wheeler
• p/e today 11.5
• p/e in March 2009 12.1
Oil and gas firms have struggled over the past year and Amec Foster Wheeler has not managed to buck the trend. Over the past year the share price has shed 27pc to 900p.
So is now a good time to pick up shares on the cheap?
One side of the argument is that investors should wait until the oil price heads higher. Brent crude is currently priced at $67 a barrel. A year ago it cost $110. Oil businesses have already reduced costs and will need to make further cuts if the oil price fails to recover.
But the counter argument is that Amec Foster Wheeler is much more than just an oil services business and has been unfairly tarnished.
Mr Ellison said: “The share price has been weighed down by the oil price fall. But it is much more diversified than the market has been giving it credit for – only half of the business is exposed to oil.”
EasyJet
• p/e today: 13
• p/e in March 2009: 14.5
In some cases shares regularly appear to be cheaply valued because they are unloved by the market.
Mr Forrest said easyJet, the airline, was a classic example. “The p/e looks cheap, but historically it has always been in between 10 and 15. This can be explained by the fact that it is not particularly popular. Investors have lost money buying airlines in the past and have not returned to the sector.”
But he said that the shares were “attractively priced”. “The business is growing its profits at a good pace and is extremely well managed,” Mr Forrest said.
Babcock
• p/e today: 14.7
• p/e in March 2009: 20
Babcock, the engineering contractor, has had a brilliant run since the financial crisis but the shares have fallen sharply over the past 18 months, declining from north of £14 to barely £10.
“Political debate over Trident has not helped here and the decommissioning of the UK’s nuclear deterrent would be a negative for the firm, which oversees this huge project, as would any cut in the nation’s submarine fleet,” Mr Mould said.
“For me investors need to see more positive news emerge for the share price to regain former levels.”