3 unloved stocks I’d buy for 2017

Credit: kropeekk_pl

Almost by definition, investors that buy shares that nobody else wants have a far better chance of grabbing a bargain. When everybody in the market has the same great idea – especially in a market as small as the ASX – shares in that company or sector quickly accelerate out of bargain territory.

Everybody knows that CSL Limited (ASX: CSL) is an attractive, high quality company, and the chances of it being a genuine bargain are slim. The three shares below are much smaller, have generally less name recognition than the hot stocks, and appear much better value in my opinion.

Thorn Group Ltd (ASX: TGA)

Regulatory issues, under-performing businesses, and falling profits – Thorn’s got it all. Yet as we can see from its annual report yesterday, the profit drop was caused by the sale of a discontinued business and excluding this, ongoing profits were up. Most of the regulatory outcomes are now quantifiable, and those that aren’t, aren’t likely to send the company out of business. Thorn trades on an estimated 8-9x of forecast full year profits, and pays a sustainable ~7% dividend – there’s value here for those who look.

Lifehealthcare Group Ltd (ASX: LHC)

Lifehealthcare has had its own issues and even though shares are up recently, it’s still cheap. This medical device seller has been cultivating its relationships with junior surgeons, while expanding into new products and product segments. The economics of buying capital items (e.g. a robotic surgery table) leads to ugly cash flows when the company is rolling out new products, which is partly why the shares are out of favour. Investors also believe that a government review into prosthetic pricing is likely to hurt sales, although as the company has repeatedly noted, it is unlikely to be affected.

Yet with a $90 million market cap, trading at 12 times earnings and paying a 5% dividend, Lifehealthcare is an attractive prospect.

Vocus Communications Limited (ASX: VOC)

Vocus’ problem is short sellers and acquisitions, with short interest rising noticeably since the announcement of the Nextgen acquisition, and again since it was approved by the competition regulator. Short-sellers are apparently betting that Vocus will have problems integrating all its numerous acquisitions, or that the switch to the NBN or increased competition will hurt profit margins. Alternatively, given that acquisitions have dried up and the industry is maturing, short sellers might be betting that market changes and executive resignations see the company fail to deliver on the forecast synergies from acquisitions.

Investors willing to look through the smoke should see a significant increase in profit this year as recent acquisitions make their first full year of contributions. Vocus has modest debt compared to industry peers, and as a telecom its earnings should be quite defensive. Over the next few years it could also deliver materially higher dividends as earnings grow and capital expenditure softens.

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Motley Fool contributor Sean O'Neill owns shares of LifeHealthcare Group Limited. 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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