It’s value stocks that I believe will steal the spotlight if the Santa Rally visits the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) this year.
These stocks have been consistently shown-up by growth stocks like Appen Ltd (ASX: APX) and CSL Limited (ASX: CSL) but are likely to play catch up over the coming months as rising bond yields are more damaging to the valuations of high-flying stocks trading at a premium to the market.
There are multiple value buys that are worth putting on your radar but two, in particular, stand out in my view even though they aren’t for those with a weak stomach.
The first is Nufarm Limited (ASX: NUF) as the stock slumped 2.3% to a three-year low of $5.92. Investors are selling first and asking questions later as they fear what the ABC’s Four Corners program tonight will reveal about the dangers of glyphosate – the active ingredient in weed killers sold by the likes of Nufarm and The Monsanto Company.
There are real concerns that glyphosate is carcinogenic but it’s not so much the threat of lawsuits that is haunting Nufarm as the threat of a total ban on the use of the chemical.
While the risk is real, I think it’s small. The thing is there isn’t a good substitute for glyphosate and using anything else will hurt the productivity and profits of the agriculture sector.
Petrol is also believed to be carcinogenic but it’s not banned. Anyone who has travelled to California would have seen the warning signs at the bower warning that petrol causes cancer in rats.
There are also other substances that are widely used but are suspected to have links to cancer – think cigarettes and sugar!
I believe any adverse outcome will be limited to greater safety measures such as warning labels and more protective equipment for those working with the chemical.
Further, the near-term outlook for Nufarm is quite positive in my view, notwithstanding the drought and the glyphosate debate.
Its European operations are performing better than many sceptics believe, its balance sheet will have a large cash buffer post the ongoing capital raise and there’s added upside from its omega-3 enriched canola seeds.
I believe the stock will re-rate as we head towards the February reporting season – making Nufarm an ideal Santa Rally trade.
The second is discount variety chain Reject Shop Ltd (ASX: TRS) with the stock crashing 40% over the past six months with the S&P/ASX 200 Cons Disc (Index:^AXJO) (ASX: XJO) has jumped 8%.
The recent profit downgrade was a letdown and a stark reversal from its better than expected first half earnings announcement in February.
But even if you factor in the downgraded profit guidance and downbeat FY19 outlook, the stock is still looking very cheap as it is on a forecast price-earnings (P/E) multiple of around 8 times for the current financial year.
Reject Shop deserves to be trading at a discount given that earnings per share this year is tipped to decline a little over 1%, but I can’t see how the low multiple is justified when other embattled retailers with arguably a worse outlook such as Harvey Norman Holdings Limited (ASX: HVN) and Myer Holdings Ltd (ASX: MYR) are trading at around a 40% premium to Reject Shop.
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Motley Fool contributor Brendon Lau owns shares of Nufarm Limited and The Reject Shop Limited. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended The Reject Shop Limited. 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 Scott Phillips.
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