4 Value Stocks for Growth Investors

Three top value investors from Schroders, Fidelity and Milkwood Capital give their stock tips for growth investors

Karen Kwok 31 May, 2017 | 3:26PM
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Standard Chartered (STAN)

“Banks are among the cheapest sectors in the world, and within the sector, Standard Chartered is one of the cheapest banks,” said Kevin Murphy, co-manager of the Silver Rated Schroder Recovery fund. The fund gained 30.2% in 2016, came third of the rank in its UK flex-cap equity category and outperformed its index – the FTSE All Share – by 13.4% in 2016.

There are very few companies that are still trading at 2009 levels, particularly in the financial sector. Standard Chartered is one of them, according to Murphy. According to Morningstar data, Standard Chartered is trading at £7.27 today, while on the same day in 2009, it was trading at £11.49. The stock peaked in 24 January 1994 at £42.93, but it fell to just £1.85 in May the same year, due to an exposé of a bribe among officials in Asia.

“Standard Chartered is now trading at two-third of its 2009 price, and nearly half of analysts think you should sell Standard Chartered. But for us, the bank is an opportunity – it has a solid balance sheet while trading at discount compared to other banks. If interest rates start moving up, you will suddenly see shares of the Standard Chartered moving aggressively. The money will start moving back to sensible, objective value. That is what we think it will happen and I hope it does,” said Murphy.

Standard Chartered is domiciled in the United Kingdom and provides trade finance banking services primarily to Asia, Africa, and the Middle East. The bank is currently amid a massive upheaval, as both internal and external forces have laid it low, said Stephen Ellis, director of financial services equity research with Morningstar.

“We believe that structural changes in the trade finance market, which included increases on fraud detection rules and higher trade barriers, as well as slowdowns in China’s growth and commodities will mean the Standard Chartered’s days of consistent 15%-20% growth are behind it,” said Ellis.

While Ellis expects the turnaround of Standard Chartered to be difficult, he believes the bank’s CEO Bill Winters has the right approach.

“Bill Winters has identified the issues with the bank’s risk controls, culture, cost base, and overall sprawl across markets where it lacks a deep understanding of the competitive dynamics.” said Ellis.

The stock is rated three-star by Morningstar analysts, meaning analysts believe the stock is trading at its estimated fair value.

Ladbrokes Coral Group (LCL)

Ladbrokes is a betting and gaming company. The company offers retail bookmaking in the UK, Australia, Belgium, Ireland and Spain and offers betting on a daily basis via the internet, mobile app and telephone.

Ladbrokes Coral is currently trading at a very low level compared to its history, at £1.31 per share. This is due to investors’ fear surrounding the regulatory reviews published later this year. Many analysts believe the retail business of Ladbrokes Coral will be impacted significantly post-review, said Alex Wright, portfolio manager of Bronze Rated Fidelity Special Situations.

“Given that 70% of Ladbrokes Coral’s earnings coming from the retail side of the business, the expectation of a fall of retail business post review suggests that those 70% of earnings will be wiped off. Investors are fearful about this uncertainty, so they have backed off from the stock,” said Wright.

However, Wright and his team continue to see growth in the company’s online presence in the market and growth from its merger with Coral.

“Over the next couple years we see a little downside while there is significant upside on the other hand. As competition and capacity of the betting market being reduced in the next few years, there are more spaces for Ladbrokes Coral to grow, which we see as an opportunity,” said Wright.

John Menzies (MNZS)

Amazon (AMZN), the well-known online retailer, hit $1,000 per share on May 30, signalling the company’s dominance in the market. While many investors have their eye on this tech stock that continues grow its market share, Rhys Summerton of Milkwood Capital shares a different view. Speaking at the London Value Conference last week, Summerton says he believes a company that has been disrupted by technological developments is an opportunity.

“We see values in disrupted companies because the market has started to avoid them, leading to their shares prices dropping – which in turn means management needs to take steps for their businesses to survive. This presents a growth opportunity. They can invest into the future, and these investments end up being beneficial,” said Summerton.

John Menzies is one such examples, according to Summerton. Menzies is a company that provides distribution and aviation support services. The company through its operating segments provide distribution of newspaper and magazine, marketing and logistics, handling of cargo and passenger services globally.

“In 1988, the management group at Menzies realised that newspapers would not be a good industry for much longer. They sold that business to their competitors WH Smith. Instead, they used that money to invest into aviation and delivery services,” said Summerton.

Since then, Menzies continued to extend their services in aviation businesses. From checking in to operate lounges, cleaning services to refuelling businesses, the company makes sure they “cater their delivery businesses to perfection”, according to Summerton. To achieve that, Menzies proposed a deal to emerge with DX (DX.), the UK-based logistics firm. The deal continues to move forward positively, expected to be done during the summer this year, a published statement read.

"I am very pleased at the progress made so far this year. The integration of ASIG is progressing well and I am confident we will be able to deliver on a deal to combine the businesses of DX and Menzies Distribution,” said Dr Dermot F Smurtift, chariman of Menzies.

"Our aviation business continues to trade strongly. The opportunities that exist to cross sell our new product lines and also to expand into new markets are very exciting and your Board looks to the future with increasing confidence."

As aviation business forecasts to grow 5% annually in the next 20 years, according to Summerton, he believes Menzies will be benefited under this structural backdrop.

“On top of that, 40% of Menzies’ business is in the US, and tax rates coming down in the US will be beneficiary to the business,” Summerton added. Share prices of Menzies John are up 19.8% year to date.

Naspers (NPN)

Naspers is another disrupted company that Summerton is interested in. Naspers is a multinational media group engaged in operating media and internet platforms. Its operations include internet services and ecommerce including online classifieds, online retail and payments pay television and print media. As print business is coming down with the emerge of computers and digital tablets, the company reinvests their money in other businesses – one of them is Tencent (00700), the Chinese e-commerce company. Since the success of Tencent in 2010, share values of the stock Naspers have grown more than 500%.

“You do not have to wait for them to unwind their company structure. The business does well if the management group makes wise decisions. They are able to give you back the return and the beauty of that is the stock always looks cheap,” said Summerton. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk