Why I think these former market darlings now offer amazing value

The Motley Fool
Compass pointing towards 'best price'
Compass pointing towards 'best price'

Contrarian investing isn’t for the faint-hearted. Finding a company that looks sufficiently unloved isn’t hard, but it’s having the conviction and patience to hang on even if its stock continues to fall that’s the real challenge, particularly when markets are already pretty volatile.

So long as you are capable of adopting a buy-and-hold mindset, however, I think there are plenty of bargains beginning to appear on the market, some as a result of their own failings, others on the back of general investor jitters.

Not so super

Clothing retailer Superdry(LSE: SDRY) is starting to look like a great value play. Once loved by investors, stock in the Cheltenham-headquartered business has fallen an astonishing 63% since the start of the year. A recent profit warning, blamed on lower sales of knits and coats following the exceptional weather we experienced over the summer, coupled with a surprise £8m in foreign exchange costs, has only served to heap more pressure on management. The weather issue can be excused as a temporary blip, but the exchange one, on the other hand, just looks careless.

There might be cause for optimism, however. News that founder and major shareholder Julian Dunkerton, dissatisfied with the current strategy, is keen to return to the company only months after leaving its board could be enough to halt the share price slide.

Shares in Superdry currently change hands for just under 9 times forecast earnings for the current financial year — a lot less than industry peers such as Ted Baker. There’s a yield of 4.4% and payouts look very secure, at least for now.

The company next reports to the market on 8 November in the form of a pre-close trading update. Of course, it’s pretty much impossible to say where the shares are headed over the short term, but my guess is that the market is already beginning to price in the possibility of more bad news. As such, any hint that things aren’t quite as bad as presumed could see a serious rebound in the stock.

Grounded…for now

The retail sector isn’t the only unloved part of the market right now. Ongoing concerns over Brexit combined with the high price of oil has led to a huge sell-off in airline stocks over the last few months. One victim has been FTSE 250 constituent Wizz Air(LSE: WIZZ).

Closing just under the 3,800p mark back in mid-July, the stock has nosedived 34% in the months since. This leaves it on a P/E of 12 — cheaper than Ryanair but more expensive than easyJet. Given the growth on offer (Wizz has a PEG ratio of just 0.72 in the current financial year), the company is once again grabbing my attention.

Wizz also has a lot of the hallmarks of a quality business — consistently high returns on capital, decent operating margins and a huge net cash position (equivalent to roughly half its market cap).

That’s not to say the largest low-cost airline in Central and Eastern Europe ticks all the boxes. For those more concerned with generating income, IAG or easyJet are probably better options. They yield 4.5% and 5.4% respectively while the Geneva-based business doesn’t return any cash to its owners.

Wizz reports its half-year results for the six months to 30 September on 7 November. Should markets have stabilised by then, I wouldn’t be surprised to see the stock begin to attract buyers.

Are You Prepared For Brexit?

Following Brexit, fear and indecision could hurt share prices in the coming months. That's why the analysts at the Motley Fool have written a free guide called "Brexit: Your 5-Step Investor's Survival Guide". To get your copy of the guide, click here now!

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. 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.