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Why this media stock looks cheap with a bullish catalyst

Many investors demand a catalyst before they are prepared to buy a stock. In other words, identifying a cheap stock just isn’t enough.

The ‘problem’ with cheap (undervalued) stocks is that it can often stay that way for quite some time. This isn’t a concern for all investors, however the time factor is important. Consider, for example that you identify a stock selling at 75 cents which you think is worth $1. If you buy it for 75 cents and 12 months later sell it for $1 – you’d no doubt be very happy as you would have just made a 33% return on your money.

In contrast, if the stock you bought for 75 cents took three years to creep up to your valuation of $1, the outcome isn’t as impressive. Yes, you still made a 33% return on your investment, however the time factor means that on an annualised basis you’ve only made 11%.

Given the factor that time has on your annualised returns, it can make sense to identify a catalyst which could lead to the re-rating of an undervalued stock before you purchase it.

Undervalued plus a catalyst.

Southern Cross Media Group Ltd (ASX: SXL) is an unloved media stock within the unloved media sector. With the share price trading near its 52-week low and on a single digit PE, this could potentially be an undervalued stock. What’s more, as highlighted by Kerry Stokes recently regarding the potential for Seven West Media to be an acquirer of radio assets, merger and acquisition activity within the sector may not be too far away. M&A activity is often a great catalyst and could be handy in helping Southern Cross’ shareholders to realise value.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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