The fund manager L1 Capital has picked out a few S&P/ASX 200 Index (ASX: XJO) shares that it views as undervalued stock market ideas.
Amid all the volatility following US tariffs, investors are seeing some names beyond ASX growth shares and the biggest companies.
A business can still be a good investment, even if its earnings aren't growing at 30% per year. We just need to invest in the right businesses at the right time when they're trading at a good value.
Let's get into which ASX 200 shares could be excellent buys today.
BlueScope Steel Ltd (ASX: BSL)
BlueScope is an important steel producer, with significant operations in the US and Australia.
L1 said that the BlueScope share price rose 12% in April as spot US steel spreads remained elevated, above US$500 per tonne, significantly higher than its guidance of US$340 per tonne.
On top of that, the fund manager noted that BlueScope's peers Nucor and Steel Dynamics reported better earnings than expected in the first quarter compared to previous guidance, with "robust shipment volumes and upbeat near-term demand outlooks amid the tariff uncertainty".
In contrast, L1 noted that Asian steel prices remained depressed as excess Chinese steel production has driven exports beyond an annual run rate of 100mt per year, acting as a headwind for steel prices across the region.
Another positive for L1 about the ASX 200 share is that it's targeting an annual operating profit (EBIT) improvement of at least $1 billion, including at least $200 million of cost reductions, $500 million from growth investments and between $500 million and $1 billion from improved market conditions. L1's final positive words on the business were as follows:
These targets provide visibility into a materially higher future earnings base, projected to exceed $1.8b, far higher than the current annual run-rate EBIT of ~$600m. More broadly, we continue to believe the market underappreciates BlueScope's unique and strategic asset base, as well as the longer-term resilience of the largely consolidated U.S. steel sector.
Santos Ltd (ASX: STO)
Another ASX 200 share that L1 highlighted was the oil and gas ASX share, Santos.
It has had a difficult time recently amid a heavy decline in the oil price. L1 noted that the Brent crude oil price has fallen 21% from US$77 per barrel to US$61 per barrel.
The key drivers of the decline were the US tariff announcements and the announcement by OPEC+ of a faster-than-expected partial end of its voluntary supply cuts. The tariffs sparked concerns over global economic activity and a possible hit to oil demand.
However, even at an oil price of around US$60 per barrel, the investment team at L1 believe in the ASX 200 shares' potential:
Santos' asset base is materially undervalued as the company continues to make significant progress on its key growth initiatives. The Barossa project is 95% complete and on track for first production in 2025, and the Pikka project is more than 80% complete. Their completion will conclude a multi-year period of elevated capex spend and represents an inflection point for cashflow and potentially shareholder returns.
