The tough times continue for value investors. With the ASX markets making fresh all-time highs, and with interest rates looking like continuing their downward trajectory, it is very possible that value investing faces even harder times ahead.
Value investors should continue to look for market mispricing and emotional reactions from other investors – being a contrarian investor is always hard but there are usually (at least some) opportunities out there. Let’s take a look at two value stocks that might be under-priced today.
Afterpay Touch Group Ltd (ASX: APT)
Yes, I know what you’re thinking! While Afterpay is not your typical value stock, the price movements over the past few days have compelled me to throw Afterpay a mention. Afterpay shares fell an astonishing 21% between Friday and yesterday on the back of news that United States (US) payments giant Visa Inc. is set to enter the ‘buy-now, pay-later’ space. Afterpay shares have recovered somewhat and are currently trading at $24.12, but are still down significantly from Friday’s high of $28.67. I have included Afterpay today as a reminder that reactions like this tend to be more emotional than logical. News that Visa is stepping in has long been dreaded by Afterpay shareholders and this is an example of fear manifesting.
Some of these fears are founded (Visa is a giant company with a war chest of cash), but Afterpay has still been highly successful in expanding overseas and has built itself a strong and recognisable brand (that has become a verb). This might be a good opportunity to jump on the Afterpay train if you have been looking for your chance.
Costa Group Holdings Ltd (ASX: CGC)
Here we have a more traditional value pick. Costa shares have been smashed over FY19 – down nearly 60% from high to low. This is mostly because of a flurry of downgrades that stemmed from issues like fruit flies, seasonal demand for its products, and revelations of raspberries that weren’t up to scratch, quality-wise. I think these issues are a good example of short-term problems influencing the long-term valuation of a company. Demand for food (and quality food like fresh fruit and vegetables at that) isn’t likely to go the way of the dodo, and I expect that the market will get over the problems Costa has been having in due time.
Of course, from a value perspective, Costa is still looking a whole lot better than Afterpay at today’s prices. But the tribulations of both companies shows the types of signs that value and contrarian investors should look for in a buying opportunity.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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.