Buying undervalued shares inevitably exposes investors to a degree of risk. After all, for a company’s share price to be relatively cheap, there is usually good reason. It could face difficult operating conditions, or an internal issue which is holding its profitability back. However, with such shares offering a wide margin of safety, their reward potential may also be high. Here are two stocks which appear to fall into that category. Both could be worth buying right now.
Difficult period
Next (LSE: NXT) has repeatedly warned that the near-term outlook for UK retailers offers little hope of positive growth. As uncertainty surrounding Brexit has built and inflation has moved higher, the company’s financial performance has come under further pressure. This was evidenced by its first quarter trading statement, which was released on Thursday. It showed a decline in total sales of 3% and, while this was as per previous guidance, the company’s share price declined by over 4% following the news.
Looking ahead, there could be more pain for retailers such as Next. Higher inflation and more uncertainty about Brexit seem to be on the horizon. This may lead to further declines in sales and profitability, with the company’s earnings due to fall by as much as 13.9% for the full year.
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Despite this, Next could be worth buying right now. Following its 20% share price fall in the last year, it now trades on a price-to-earnings (P/E) ratio of 10.5. It yields 3.8%, which is more than doubled after special dividends are factored-in. Therefore, the company’s overall yield is in excess of 8% and with a relatively low P/E ratio this mean that, for long-term investors, it may deliver stunning total returns.
Long-term potential
Also reporting on Thursday was goldminer Randgold Resources (LSE: RRS). It delivered a rise in gold production of 10% versus the first quarter of 2016. This helped to push profit higher by 33%, with a fall in total cash costs of 4% also boosting the company’s financial performance.
Growing profitability means that cash levels increased by 16% to $600m. With no debt, the company has significant scope to raise dividends at a rapid rate. A 52% increase to $1 per share could be the start of a sustained growth in shareholder payouts.
Clearly, the outlook for the gold price is relatively uncertain. The high levels of inflation which were anticipated following Donald Trump’s election victory have failed to materialise as yet. However, with his spending plans and tax reforms yet to be implemented in full, there is still time for inflation to edge higher. This could lead to higher demand for a store of wealth such as gold.
Since Randgold Resources trades on a price-to-earnings growth (PEG) ratio of just one, it seems to be substantially undervalued. With a rapidly-growing dividend and the prospect of a higher gold price over the medium term, now could be the perfect time to buy a slice of it.
