The stock market is a funny thing. Most of the time, it values ASX shares in a rational way. But sometimes the markets can get either too pessimistic, or too exuberant, and can undershoot or overshoot a company's true worth. And that means either cheap ASX shares or expensive ones.
As Warren Buffett says, "price is what you pay, value is what you get". Buffett has also described the stock market in a more colourful way, labelling it "manic depressive".
So with this in mind, let's talk about three ASX shares that I think the markets are undervaluing right now, and are thus trading below their fair value.
3 ASX shares that are trading below their true worth
Adairs Ltd (ASX: ADH)
ASX 200 retail share Adairs is first up. This homewares retail chain has had a rough few months, falling around 35% since February:
But today's share price of $1.88 (at the time of writing) puts Adairs shares at a price-to-earnings (P/E) ratio of just 6.81.
That's despite Adairs posting a 12.9% rise in revenues over FY2022 to a record $564.5 million. This company is not a defensive share, being part of the consumer discretionary sector. However, I think this sell-off has been excessive, exemplified by Adairs' current (and fully franked) dividend yield of over 9.5%.
JB Hi-Fi Ltd (ASX: JBH)
JB Hi-Fi is another ASX 200 retail share that has had a turbulent time in recent months, and is presently down around 14% from its January highs:
Again, the company's recent financial results show it is a resilient business though.
Just last month, this electronics retailer told investors that Australian sales were up by almost 39% against its pre-COVID levels. And in FY2022, the company posted a record after-tax profit of $545 million, which was up 7.7% over FY21's numbers.
So again, with JB's P/E ratio of just 8.32 and its trailing and fully-franked dividend yield sitting at almost 8.3% today, this is another ASX 200 share that I think the markets are being too hard on.
MFF Capital Ltd (ASX: MFF)
ASX listed investment companies (LICS) are one of the easiest investments to value, because they tend to periodically tell shareholders exactly how much they are worth. In MFF's case, it's every week. MFF is a LIC that focuses on Buffett-style investing with a portfolio of mostly US shares. Some of its long-term holdings include Visa, Mastercard, and Amazon.com.
It is run by the venerable Chris Mackay, who was one of the co-founders of Magellan Financial Group Ltd (ASX: MFG).
According to this LIC's latest net tangible value (NTA) update, each MFF share represented a pre-tax value of $3.32 per share as of 26 May, and a post-tax value of $2.86. Yet right now, MFF shares are trading at $2.75 each, and were asking as little as $2.55 at one point last month:
Today's share price represents an almost 4% discount to that post-tax NTA and more than 17% from the pre-tax number.
So that's hard evidence that this ASX LIC is being undervalued today and is another cheap ASX share.
