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Value stocks represent a unique opportunity to buy cheap stocks for potentially market-beating gains over the long term.
However, in my opinion, not all of them are smart investments. Two stocks I recently considered are Kingfisher (LSE: KGF) and Vistry Group (LSE: VTY).
Here are my thoughts on both stocks.
I would avoid
Personally, I wouldn't buy Kingfisher shares right now. The home improvement company and owner of the popular B&Q and Screwfix brands has had a tough couple of years.
When the pandemic hit and people had nowhere to go and more money in their pockets, DIY exploded in popularity and Kingfisher did well. I remember a couple of mini-projects I undertook, although I won't comment on how they turned out.
Since then, economic volatility has hurt performance and stocks. Over a 12-month period, Kingfisher shares are down 14%, from 267p this time last year to current levels of 228p.
From a bullish standpoint, the stock is trading at a price-to-earnings ratio of just over seven and offers a dividend yield of over 5%, which is attractive. However, the performance has increased due to the stock's decline.
Furthermore, interest rates will not remain at their current levels forever and inflationary pressures are easing. This could put more cash in consumers' pockets and an appetite to start home improvement projects again.
However, I find the current uncertainty discouraging. This is the main reason behind my decision to watch the stock, instead of buying it.
A prime example of the murky economic outlook is when inflation unexpectedly rose last month. Mortgage providers in turn raised rates following rumors of a possible decline.
I will be watching with great interest and may review my position on Kingfisher shares soon.
I would buy
I'd gladly add Vistry shares to my holdings next time I have some extra cash to invest. The homebuilder, like its peers, has also fallen on hard times recently due to the aforementioned volatility. Soaring inflation and higher interest rates have impacted completions, sales and margin levels.
However, rising sentiment has sent the shares up 27% in a 12-month period, from 796p this time last year to current levels of 1,018p.
I believe that the property stock has the capacity to provide excellent long-term growth and profitability. This is related to the rapid growth of the UK population and the fact that demand for housing is outstripping supply.
With this in mind, Vistry's valuation with a P/E ratio of 11 and a dividend yield of 5.5% is attractive.
Like Kingfisher, the current economic pressure could present problems in the short and medium term. This includes continued inflationary pressures that could keep costs high and put pressure on margins.
However, the long-term outlook is much more attractive for Vistry and I am more optimistic about its prospects compared to Kingfisher.
Overall, homebuyer appetite is improving, despite a difficult 12 to 18 months. I think now could be a good time to buy Vistry shares before they continue their rise. They may be too expensive for me if I wait too long.
