Many studies have shown that value investing is the most successful strategy if you want to profit in the markets. However, value investing is not an easy task; you have to be prepared to buy when everyone else is selling and buy stocks that no one else would touch with a barge pole.
It takes an iron will to invest your money in a stock that everyone else is selling or avoiding. Unfortunately, investors' general avoidance of stocks the rest of the market hates, is the reason why value investing has been so successful. So if you want to profit from this strategy, you're going to have to take a few leaps of faith.
A leap of faith
Marshall Motor Holdings(LSE: MMH) is one company it appears the rest of the market hates but could be a great value play. At the time of writing, shares in the motor dealer and vehicle leasing company trade at a forward P/E of 5.2, an exceptionally depressed multiple. The shares also support a dividend yield of 4.5%. The question is, why is the market avoiding this company?
Marshall isn't the only motor company trading at a discount valuation. All of the company's listed car dealership peers are trading at P/Es of 10 or less, despite steady sales and profit growth. Still, it seems that investors are avoiding these businesses due to the uncertainty surrounding Brexit. Consumers usually give up high ticket items first during an economic downturn, which means that if the economic environment does deteriorate further, car sales might collapse.
On the other hand, if the Brexit fall-out isn't as severe as expected, then Marshall will continue to grow steadily.
Room to double
If car sales remain robust, then shares in Marshall could double as investors bid the company up to a valuation that's more suitable. Even if there is no substantial growth in sales, the market might also bid the shares up off the back of a better-than-expected trading performance.
As the shares are currently trading at such a deeply discounted valuation, it seems that there is already a lot of bad news baked in and any good news could lead to a quick re-rating of the stock.
International Personal Finance(LSE: IPF) is another deeply discounted stock the market appears to be avoiding. Shares in the personal finance company currently trade at a forward P/E of 5.6. City analysts aren't expecting any growth from the business this year, but next year earnings per share growth of 14% is projected. Based on this forecast the shares look exceptionally cheap, and they also support a dividend yield of 7.8%. The payout is covered two-and-a-half times by earnings per share.
Considering International Personal Finance's projected growth rate and the company's dividend yield, it looks to be a great value investment, but its business of unsecured lending across Eastern Europe is relatively unpredictable. While the company may be cheap, the shares are only suitable for those investors with a high risk-tolerance.
Make money, not mistakes
If you're interested in these companies, it may be sensible to conduct further due diligence and hold them in a well-diversified portfolio.
Many investors fail to follow this key piece of advice. According to financial research firm DALBAR the average investor underperforms the wider market by around 5.3% annually thanks to a lack of diversification.
To help you avoid this key mistake, the Motley Fool has put together this free report entitled The Worst Mistakes Investors Make.
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Rupert Hargreaves has no position in any 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.