Helia Group Ltd (ASX: HLI) could be one heck of an ASX bargain stock, according to top brokers.
Shares in the lender's mortgage insurance (LMI) provider have gyrated in 2024, dropping by 11% to finish the session at $3.85 per share on Monday.
With the stock selling to compressed valuations, it is now significantly cheaper than many other options on the market. But is this drop an opportunity or a warning sign? Let's see what the experts say.
Is Helia an ASX bargain stock?
The LMI sector is a niche but essential part of the financial services industry. Many people require it to obtain financing on their homes or similar investments.
Helia's recent price fluctuations were triggered by news that Commonwealth Bank of Australia (ASX: CBA) was tendering its LMI contract, a key revenue source for Helia.
This led to a sell-off, but the stock bounced back nearly 15% in a single day following a broker upgrade from Macquarie. Unfortunately, it wasn't enough to offset the selling pressures on Helia stock this year.
Despite this, brokers seem cautiously optimistic about whether Helia is an ASX bargain stock
Macquarie analysts suggest that Helia is well-positioned to retain this critical contract due to its strong track record and long-standing relationship with CBA.
The broker set a price target of $3.90 per share, implying a modest upside of about 1% before the open on Tuesday.
Meanwhile, Goldman Sachs also sees potential in Helia, though with a more cautious approach. It isn't worried about the contract situation at all, noting it doesn't expire until the end of 2025.
Goldman values Helia much higher at $4.53 per share, which is more than 17% upside potential at the time of writing.
Is Helia too cheap to ignore?
A wide gap between a trading price and a broker's price target doesn't make it 'cheap'. Instead, investors should look to the multiple they pay relative to a business' profits to determine whether it's expensive or not.
With a price-to-earnings ratio (P/E) ratio of 4.4 times, Helia is trading at a valuation that's hard to ignore.
That valuation says investors are paying just $4.40 for every dollar of Helia's earnings.
Consider this – you're paying $18 per dollar of earnings for the broader market, as reflected by the iShares Core S&P/ASX 200 ETF (ASX: IOZ).
Would you pay less than $5 for a dollar of future earnings into perpetuity in a world where the market pays $18?
Moreover, the stock offers a partly franked dividend yield of 7.7%, which could be particularly appealing to income-focused investors.
However, it's important to remember that a low valuation alone doesn't make a stock a good buy. Investors should consider the underlying business and its prospects.
Foolish takeaway
The debate is whether Helia presents itself as an ASX bargain stock. On the one hand, it is trading at cheap multiples, with broker price targets saying there's potential for upside.
Many risks remain, however. For investors looking at Helia, the recent price drop might represent a buying opportunity, but it's essential to conduct your own due diligence and speak to a professional before making any investment decisions. Past performance is also no guarantee of future results.
