Where to find value inside the top 50 ASX shares in May

Value can be found in all shapes and sizes. These large-caps is where I believe future outperformance can be made.

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Many time-tested quality companies are within the top 50 ASX shares, known as the S&P/ASX 50 Index (ASX: XFL). On the flip side, I'd also argue there's a fair number of mediocre to poor businesses within the mix that I'd rather not own.

Sure, I could buy the entire bunch through an exchange-traded fund (ETF) and call it a day. But I believe that a little fundamental analysis goes a long way. It doesn't take a rocket scientist to work out that an extremely indebted business with declining revenue may not have as bright of a future as some of its peers.

I've flipped through the top 50 big dogs of Australian equities. After doing a little digging, two companies are a strong buy this month at the current prices, in my opinion.

Detecting for top value shares on the ASX

Being a stock picker is all about 'finding value' — discovering the companies with upside where others see none.

Uncovering a misunderstood business with solid fundamentals is the holy grail of stock picking. Investing in such a stock can grow a person's wealth well beyond the market average.

I believe Aristocrat Leisure Limited (ASX: ALL) is one top ASX share that fits the bill this month.

A pioneer in gaming technology, Aristocrat knows the industry well. Yet, investors have shied away from this top ASX share amid softness in pokie machine sales. Concerns have pushed the Aristocrat Leisure price-to-earnings (P/E) ratio down to its lowest since 2020, during the pandemic, at around 18 times earnings.

A net cash position of $845 million, a net income margin of 21%, and an expanding presence in the United States haven't won over the market. The chart below shows that shares in Aristocrat Leisure are flat versus a year ago.

In my opinion, Aristocrat Leisure has appealing fundamentals and a hard-to-ignore valuation.

Moving along, Origin Energy Ltd (ASX: ORG) is also catching my attention in May. The largest listed utility company on the Australian market might be up 18.8% over the last 12 months, but I still think there is value to be found.

First, Origin easily touts the healthiest balance sheet out of the three largest ASX utility companies. Debt-to-equity has been drastically reduced from 80% to 30% over the last decade. Whereas AGL Energy Ltd (ASX: AGL) has increased slightly (41% to 45%), and APA Group (ASX: APA) has ballooned (117% to 364%).

My two cents are that Origin Energy appears to be skillfully positioning itself for the energy transition. The combination of gas production, renewable energy assets, and its finger in smart grid technology via its Octopus Energy stake is a future-proof mix.

I think it's an undervalued combination of assets, even at a market capitalisation of $17.1 billion.

Honourable mention goes to

I won't be calling the bottom for Pilbara Minerals Ltd (ASX: PLS) just yet. Still, the most shorted stock on the ASX could be starting to show signs of value for anyone brave enough to face the ocean of short sellers.

Sitting on nearly $1.7 billion of net cash, the top ASX lithium share is positioned to ride out subdued lithium demand. Given the quality of its resources and low cost of production, Pilbara Minerals is one miner that can make it through the lull.

While I won't be rushing out to buy shares in this lithium company, it's certainly a top 50 ASX share I'll watch closely.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Apa Group. 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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