Stock markets have bounced around this week – significantly depressed on Monday, with reversed fortunes just 24 hours later. Buying equities on these short-term fluctuations is best left to the professionals but if you are looking for long term investment opportunities we have highlighted three stocks that are trading at below their market value according to Morningstar equity analysts.
Burberry (BRBY)
If you had been savvy enough to invest in Burberry in November 2008 when the shares were worth £1.60 you would have seen your money grow ten times in value. A lot of this share price inflation can be put down to the appointment of Christopher Bailey as head designer in 2009.The Yorkshire-born creative overhauled Burberry’s image and its global revenues. In October 2013 Burberry chief executive Angela Ahrendts left to work for Apple (AAPL) and Bailey took over as chief executive – retaining his position as chief creative officer too. The share price dipped on the news – but stabilised to rise to a peak of £19 in February this year.
But a lot of the global interest Bailey sparked is centred in emerging markets – and in particular Asia. The luxury brand opened a flagship store in Shanghai in April last year with a 1,500-guest party. And so when the Chinese stock market began to lose value earlier this year, so did Burberry’s share price.
“Our forecast for 2016 growth is for low-single-digit retail space expansion resulting in retail growth reaching mid-to-high single digits after additional positive same-store sales are offset by exchange-rate fluctuations, 20 store openings, and 20 closings,” said Morningstar equity analyst Paul Swinand.
“Possessing a brand with recognisable fashion elements such as its iconic plaids and a history of innovations, including patenting the trench coat and creating the fabric gabardine, the Burberry brand is a source of superior economic returns, in our view, that is hard for competitors to encroach on
Prudential (PRU)
Prudential is another stock that has been hit by its exposure to China. The insurer’s head of Asia business Tony Wilkey said earlier this month: “So far we have not seen any significant negative impact either in China or in Hong Kong.”
It is the second hit in as many years for the insurer; last year the Pru shares fell along with all other annuity providers when Chancellor George Osborne scrapped compulsory annuity purchase on retirement. But Morningstar equity analyst Vincent Lui says that the company’s opportunistic expansion in new products and markets that has fueled revenue growth for the U.K. insurer at an industry-leading pace in the post-financial-crisis era.
“While the U.K. business has been gradually shifting from insurance to corporate pensions to alleviate some of its capital needs, we think Prudential plc is likely to face fierce competition from more traditional asset managers in the retirement market in the region,” he said.
“Prudential's Asia business remains the crown jewel of the insurance group, selling high-margin products, including health and protection insurance, through an extensive agent network.”
BHP Billiton (BLT)
Commodities have had a tricky run – and if China is going to be spending less on development and infrastructure in the near future this is not going to change any time soon. But that does not change the fundamentals of BHP as a business. Morningstar equity analyst Mark Taylor says the bulk of the BHP Billiton fair value estimate derives from just three commodities: iron ore, copper, and petroleum in broadly equal one-third contributions. With the exception of iron ore, Taylor thinks BHP lacks real pricing power in its products, but it is worth significantly more than the current share price of £10.64.
“This narrow-moat company has several key advantages,” said Taylor. “It produces a range of commodities from oil and gas to nickel, and it is a major producer of iron ore, copper, thermal coal, and metallurgical coal. Geographic and product diversification give BHP Billiton more stable cash flow and lower operating risk than most of its mining peers.”
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