The two unloved ASX shares in this article could stage a big turnaround if things go their way.
COVID-19 caused most shares to crash during February 2020 and March 2020. Many of those shares have since recovered. Some of them have even gone on to hit new highs like Afterpay Ltd (ASX: APT).
But some ASX shares are still lagging behind. They are seemingly unloved by the market. But I think they could stage a big turnaround around if things go their way:
Share 1: Challenger Ltd (ASX: CGF)
At the time of writing the Challenger share price is still down around 50% from where it was just before the COVID-19 share market crash.
This ASX share is the leading annuity provider in Australia. An annuity provides a guaranteed source of income for people from their capital. It sells annuities under its own name and it also offers a white label product for a number of other financial institutions.
The low interest rates across the world is definitely a problem for Challenger. The RBA has pushed Australia's interest rate down to just 0.25%. Challenger needs to generate a return to pay for the annuities that it issues. It's much harder to make a decent return from fixed interest investments when interest rates are almost 0%.
However, I think the ASX share is priced too cheaply for the long-term. Interest rates could rise again and sales remain robust. In the third quarter of FY20 Challenger reported total life sales of $949 million, up 9% compared to the prior corresponding period. Total annuity sales were down 10% to $593 million but other life sales were up 71% to $356 million.
COVID-19 and the Hayne Royal Commission has caused disruption for financial advisers. But I believe these effects will dissipate as time goes on and life goes back to normal.
One of the most important things in my opinion is that Challenger is still guiding for normalised net profit before tax of $500 million to $550 million in FY20. I think this would be a solid result under the circumstances.
Don't forget, Challenger didn't cut its dividend during the GFC. So the grossed-up dividend yield of 9.6% could be the ongoing dividend payment. The dividend alone could be a solid return from this ASX share.
Share 2: Brickworks Limited (ASX: BKW)
The Brickworks share price is still down 22% from the 20 February 2020 level.
Brickworks is a diversified building products business with two additional asset divisions. It owns a large chunk of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares which provides reliable earnings and growing dividends.
The ASX share also owns a 50% stake of an industrial property trust along with Goodman Group (ASX: GMG). The rise of ecommerce is helping increase the demand for industrial properties. The new industrial estate at Oakdale in New South Wales will materially increase the value of the property trust and its rental income once the project is completed.
Investors have rightly identified that construction in Australia faces a difficult time in the shorter-term because of the economic impacts caused by COVID-19.
However, I don't think that demand for bricks, masonry, roofing and so on has been reduced forever. Construction is known for being cyclical. I believe that construction will return to somewhat normal once the economy has completely opened up and normal immigration can restart. The $25,000 HomeBuilder scheme could also help Brickworks in the shorter-term.
I'm excited by the potential of the recent US acquisitions that Brickworks has made because of how large the market is in North America. The US is also dealing with the impacts of COVID-19, but again, it won't last forever.
The ASX share also happens to be one of the best dividend shares on the ASX in my opinion. It hasn't cut its dividend in over four decades. It currently offers a grossed-up dividend yield of 5.3%.
Foolish takeaway
Both of these ASX shares look cheap to me. They have fallen on hard times but I think they could bounce back nicely as Australia continues its recovery from COVID-19. Out of the two I'd prefer to go for Brickworks because it's hard to say how long interest rates will still at these ultra-low levels.
