Here's why I might buy these 2 beaten-up share bargains

Magellan Flagship Fund Limited (ASX:MFF) and Reject Shop Ltd (ASX:TRS) are two potentially undervalued shares.

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To paraphrase investment guru Warren Buffett, buying shares is like buying socks – load up when they're cheap!

Whilst the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is trading around the 5,400 point level which is close to its 52-week high of 5,611 points, there are a handful of stocks which are currently trading at fresh 52-week lows.

Here are two beaten-up stocks that could be bargains, which you might want to consider.

Magellan Flagship Fund Limited (ASX: MFF) – this listed investment company (LIC) is managed by global fund manager Magellan Financial Group Ltd (ASX: MFG).

Over the past year, while the share price of the management company has rallied around 6%, shares in the LIC have dropped nearly 10% and last week touched a fresh 52-week low of $1.59.

Despite the lacklustre near term performance of Magellan Flagship Fund I remain positive on the potential for this portfolio. Highlighting the ability of the manager to add value, Magellan Flagship Fund's share price is up an impressive 164% over the past five years.

The portfolio is constructed with a focus on high-quality US-listed companies such as Visa, Home Depot and Microsoft. Stocks are only added to the portfolio when they are available at attractive prices.

With the share price trading close to its post-tax net tangible asset backing, the stock could be considered fair value. Given the manager's stock-picking track record there is reason to believe that the portfolio can provide solid returns to shareholders in the future.

Now could be an attractive time to begin building a stake in this LIC.

Reject Shop Ltd (ASX: TRS) – the share price of this discount retailer touched a new 52-week low of $9.10 last week.

The stock has now fallen 20% in the past three months, although over the last year the share price is actually up 4.5%.

Interestingly, the recent weak share price performance comes in the wake of a strong set of full year results.

For the 12 months ending June 30:

  • Sales grew 5.7% to $800 million, with comparable store sales up 3%
  • Underlying profit soared 47.5% to $21 million, equating to 72.8 cents per share (cps)
  • Full year dividends were ratcheted up from 30 cps to 44 cps

With the stock trading on a price-to-earnings (PE) ratio of just under 13 times, the Reject Shop's share price would appear to be undemanding.

Assuming the company can continue to grow sales at a similar rate in the current financial year, then now could be an attractive entry point for this retailer.

Foolish takeaway

Warren Buffett once stated that you pay a high price for a cheery consensus.

Whilst it rarely feels comfortable to buy a stock which is out-of-favour with the market, it is amongst this unloved group that shares with the highest potential to outperform are likely to be found.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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