Image source: Getty Images
Value investing is finding opportunities to buy stocks when they are unusually cheap. But this is not always simple.
At the moment, I think there are a couple of UK stocks that would be worth looking into. At first glance they don't look like bargains, but closer inspection suggests they could have value here.
Carnival
Many of the best-performing British stocks of recent years have been Covid-19 recovery stories. But the cruise line business Carnival (LSE:CCL) has not been one of them.
Shares are still down 62% from five years ago as the company's profits have not recovered from the pandemic. The big problem is the debt that the company has on its balance sheet.
As a result, the company is paying around £1.3 billion in interest expenses a year, compared with £142 million in 2019. And there is a risk that it will have to issue shares to pay its obligations.
The good news, however, is that interest rates are starting to come down. And this should help reduce the effect of Carnival's debt on its earnings and free cash flows.
Right now, the company's shares are trading with a price-to-earnings (P/E) multiple of around 14. Beyond the volatile Covid-19 years, that's not unusually high for the stock.
If an improved balance sheet can lead to higher profits in the future, Carnival stock could be a great value. I certainly think it's worth a closer look for value investors.
Ibstock
With a P/E ratio of 101, FTSE 250 brick company Ibstock (LSE:IBST) doesn't look like a bargain. But a closer look at the business reveals a slightly different picture.
Ibstock's earnings per share have fallen from 22p to 2p since 2022. That's why the P/E multiple is high even though the stock is down 20% in the last five years.
The main reason is the weak construction output in the UK. The question for investors is whether this is cyclical or permanent, and I think there are reasons to think it's the former.
UK house prices have risen at their fastest rate in three years. And this could be a big incentive for home builders, creating greater demand for bricks and other materials.
A potential risk for Ibstock is the possibility that house building techniques will change to become less reliant on brick. There are some signs that this is happening elsewhere, especially in Europe.
Overall, however, the company appears to benefit from a recovery in construction, but the share price arguably does not reflect this. So I think it's something value investors should consider.
Value opportunities
Many times, stocks are cheap for a reason: it's because there are ongoing problems with the underlying businesses. That's one of the risks of value investing.
However, with Carnival and Ibstock I don't think that is the case. Both have faced challenges recently, but I think there's a good chance they're temporary in nature.
It's hard to predict exactly when things will start to improve. But if they do, then current prices could be good opportunities for investors looking for long-term returns.
