2 ‘must-buy’ undervalued stocks I’m going to hold for 10 years or more

James Reynolds — Tue, 11 Jan 2022 14:09:04 +0000

I, like many investors, crave undervalued stocks. Not only do they have untapped potential, but often they’re incredibly affordable. Here are two companies I think fit that criteria and that I intend to hold for a decade to maximise returns.

A light at the end of the tunnel

If reports that Omicron really does cause milder symptoms are true, then I think we could actually be seeing the light at the end of the tunnel. And if that is the case, then the first thing I’ll be doing is booking a holiday.

I’ve already outlined my hesitancy about investing in airlines in 2021. I thought that many investors were overly optimistic about a return to normal and have been burned by lockdown after lockdown. But now the easyJet (LSE: EZJ) share price is 621p, 32% lower than this summer’s high of 921p. Its price-to-earnings ratio (P/E) sits at 12.8, only a little higher than the last 13 years median of 12.69. If the pandemic continues to wind down in severity, then I think we could see a much larger boom in value as we approach the summer.

But there’s no sugar-coating the fact that easyJet has suffered a lot over the pandemic. It will need to find inventive ways to maximise revenue in the coming years. But, against the odds, it survived and has managed to minimise losses at every turn. Cash burn was inevitable, but easyJet was able to keep it to £36m per week, a full £4m below the expected £40m. This resilience in the face of disaster has really impressed me and I can’t wait to see what the company does in better times.

A cheap but valuable digital service

Wise (LSE: WISE) makes it simple and inexpensive to move money across currencies and bank accounts. This UK IT firm went public in early 2021 and its stock price soared to 1,150p in September before plummeting to 678p at the time of writing. This is pretty normal for a company following an IPO since it takes time for the market to identify a share’s actual worth. Right now, the stock’s P/E ratio sits at a very low 5.16, meaning the price of the shares are closely aligned with the company’s earnings.

If I had any doubts about the health of the company, I need only look at customer and revenue growth over 2021. Revenue nearly quadrupled while Wise provided services to 10 million customers, up four million from 2020.

One thing I’m concerned about though is the company’s small profit margins. Earnings have fallen as the company has looked to expand into new markets. The smaller margins of course put Wise on shakier ground. If there’s a big black swan event in the global economy it could send it off balance. But, having said that, the pandemic was the ultimate black swan event and Wise has not only survived, but thrived. As life returns to normal, I think Wise, like easyJet, has the potential to benefit massively from pent-up travel demand.

Truly undervalued shares are hard to find, but I think these companies have both shown extraordinary resilience in the face of disaster. Now that their shares have fallen in price, I believe they will make excellent additions to my long-term portfolio.

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James Reynolds 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.

Undervalued shares: 2 top UK companies that are still ‘on sale’

James Reynolds — Wed, 01 Dec 2021 14:23:05 +0000

As fears around the Omicron Covid variant temporarily pulled down markets late last week and early this week, investors scrambled to pick up undervalued shares. Unfortunately for some, it seems that the flash crash is over. However, there are still many great UK companies that continue to be undervalued by the wider market.

JD Sports Fashion (LSE: JD) has had a phenomenal 2021. The sports clothing retailer opened a further 600 stores around the world. And it increased its revenue to a new all-time high of £3.8bn. It also nearly tripled the pre-tax profits made in 2019, going from £158m to £439m. Yet right now, the share price is trading at 222p, down from 234p on November 18 (but up from 146p this time last year).

Risks and rewards

Everything seems to be going well for JD but all is not perfect. It has been ordered to sell Footasylum, one of its subsidiary chains, over competition concerns. While it owns more than 50 brands, Footasylum is a very recognisable part of its business, bringing in an additional £232m in revenue in the 2021 financial year, even though this was down 6.8% from FY 2020 due to the pandemic.

Naturally being forced to sell a chunk of its operations isn’t ideal for a business, and I believe that concerns about how this will affect next year’s profits are keeping the share price down.

But JD remains a buoyant company with fingers in many pies in the UK and further afield. That includes sportswear, gyms, outdoor clothing and several other shoe brands. I think that its store expansion seen this year will continue to increase its earnings in 2022 and am more than happy to add it to my portfolio.

A lot to like

Wise (LSE: WISE), formerly known as TransferWise, is a UK-based financial technology company that allows its users to send money around the world quickly and cheaply, while offering some of the most competitive exchange rates on the market.

Wise first went public early this year and has naturally lost some of its value, falling from 880p in July down to 777p in early December. This is fairly common after an IPO as the market takes time to determine the true value of a share.

There’s a lot I like about Wise. As a tech company the majority of its operations take place online, resulting in lower overheads. It also earns cash by taking a small cut of each exchange, allowing the business to scale with user volume.

Customer numbers surged this year resulting in a 43% jump in revenue in Q1. Earnings have also doubled from 2020, although the margins have shrunk. Wise’s management decided to expand operations, develop new products and enter new markets. One of best products it offers is the borderless account and debit card, which allows people to spend money anywhere in the world, converting currencies at real-time exchange rates.

Its current market cap is £7.7bn but the share’s price-to-earnings ratio is uncomfortably high at 352.55. Investors clearly believe in the company but it’s still something that concerns me.

I think that the shares may be overvalued in the short term, but undervalued over the long term. Once more people learn of the borderless account, I think its user base will skyrocket. I definitely want to be owning Wise shares when that happens.

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