The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index may be trading close to multi-year highs but this doesn’t mean that undervalued stocks are hard to find.
Having said that, I would be reluctant to go overweight on equities at this point (my largest position is still in cash) and believe investors should only be selectively buying shares of companies that have reported their results.
Bargain hunters might be appalled by this strategy as shares of a company reporting good results would have jumped before they got a chance to buy the stock.
But this is a less risky approach in my view given that how hard a stock crashes if management misses earnings expectations.
Also, shares of companies that deliver surprisingly good results typically continue to outperform over several weeks, if not months.
From that perspective, investors may want to put media conglomerate NEWS CORP/IDR UNRESTR (ASX: NWS) on their watchlist.
The News Corp share price jumped 0.6% to a 52-week high of $21.53 after Credit Suisse upgraded the stock to “outperform” from “neutral” following the release of its earnings results.
While revenue missed expectations, its earnings before interest, tax, depreciation and amortisation (EBITDA) came in higher than consensus and Credit Suisse’s estimates.
“Current trading levels imply that the value of NWS’s assets (ex REA) has effectively halved since the split from FOX back in 2013,” said the broker which has a price target of $22.50 per share.
“We don’t think this is justified given the underlying performance, and an increasing focus from management on value (which we believe is now evident given the News America Marketing review) can act to close the valuation gap.”
Steady is the new up
Another worth watching is investment account services group Praemium Ltd (ASX: PPS) with Morgans reiterating its “add” recommendation on the stock following the release of its results.
“Praemium produced a steady-as-she goes profit with no major surprises. Australia continues to do all the heavy lifting in profit generation and the UK continues to lag,” said the broker.
“PPS is still struggling to achieve real scale economies. Only when the UK reaches critical mass will the company achieve its potential.”
Morgans has a 59-cent a share price target on the stock.
Building materials group James Hardie Industries plc (ASX: JHX) also impressed with its latest results, which pushed the JHX share price to a 52-week high of $22.30 on Tuesday.
Most brokers have re-iterated their “buy” recommendation on the stock, including Macquarie Group Ltd (ASX: MQG).
“This was solid result, showing the first credible signs of execution of a plan that aims to deliver a systemically stronger organisation,” said Macquarie.
“We continue to think the medium to longer term thesis is a strong one, supported by firm, if somewhat unexciting, market conditions.”
Macquarie has a 12-month price target of $25.35 a share.
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Brendon Lau owns shares of James Hardie Industries plc and Macquarie Group Limited. Connect with him on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Praemium Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended Praemium 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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