Sometimes opportunity knocks with forgotten stocks. FlexiGroup Limited (ASX: FXL) is a classic example, experiencing low volumes and still trading on a modest Price to Earnings (P/E) valuation of 13 despite posting 9% profit growth and paying a 4.7%, fully-franked dividend.
(You can find a better overview of FlexiGroup Limited in this article here)
Of course, sometimes stocks are forgotten for a reason.
Discount retailer Reject Shop Ltd (ASX: TRS) made a lot of headlines a while ago after some horror results and a profit downgrade. It was subsequently dropped from its index and experienced a tidal wave of selling pressure at a time when there was little buying interest.
Shares have gained nearly 50% since then, but do Reject Shop's P/E of 10 and 3.8% dividend reflect good value today?
Revenue rose 4.4% at the half-year update in February, while profits declined another 24% as a result of poor sales performance and heavy markdowns. Gross margins remained constant while the Cost of Doing Business climbed 1.5%.
Importantly sales recovered in the second quarter of the year as management focusses on closing underperforming stores and optimising operations. However there are also a number of risks including competition, poor consumer confidence, and a falling Australian dollar.
It's too soon to evaluate how management's turnaround strategy is faring, and I would consider the Reject Shop a hold for the moment.
Treasury Wine Estates Ltd (ASX: TWE) is another classic forgotten stock ever since a proposed takeover – at an exorbitant premium – was rejected by management after consultation with major shareholders.
Shares went even higher in April this year, peaking at $5.89 before heading down to today's levels of $5.43. Investors are apparently buying into 8% revenue growth and improvement in Earnings Before Interest and Tax.
It's a substantial improvement, and well overdue, driven by improvements to the supply chain, timing of vintages, and optimisation of its facility usage both here and overseas. In this respect Treasury Wines reminds me distinctly of Coca-Cola Amatil Ltd (ASX: CCL), which is also reorganising its business after a poor 2014.
Unlike Coca-Cola however, Treasury comes with additional risks that are associated with agriculture stocks; namely lumpy earnings and exposure to adverse weather – which happens more often than you think.
Although the company has fallen from recent highs, I think it is still overpriced given that there are plenty of alternatives, and I would consider selling my shares to look for other opportunities.
Finally Slater & Gordon Limited (ASX: SGH) has faded from the public eye somewhat, despite its recent acquisition of Quindell's Professional Services Division (PSD), which was approved by the UK regulator just last week.
Slater & Gordon has a strong track record of integrating acquisitions, and although the PSD is a big bite I expect it to be integrated fairly seamlessly in time.
The real question to my mind is whether the income from the purchase can provide enough benefits to outweigh the additional risks of greater debt and weaker cash-flow sustained as a result. Slater & Gordon shares have experienced a fantastic run, but I would consider putting them on hold until you can evaluate the acquisition through future market updates.
(Interestingly, SGH owner Tom Richardson also thinks the stock is a hold. Find the case for and against in his article here)
