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Value investing is finding opportunities to buy stocks when they are unusually cheap. But this is not always straightforward.
In the meantime, I think there are a few UK stocks to watch. They don't look like bargains at first glance, but closer inspection suggests there may be value here.
Carnival
Many of the best performing UK stocks of the past few years have been news of the Covid-19 recovery. But the cruise line business Carnival (LSE:CCL) has never been one of them.
The stock is down 62% from where it was five years ago as the company's profits have not recovered from the pandemic. The biggest problem is the debt the company has on its balance sheet.
As a result, the business pays around £1.3bn in interest costs a year, compared to £142m in 2019. And there is a risk that it will have to issue shares to pay its debts.
However, the good news is that interest rates are starting to come down. And this should help reduce the impact of Carnival's debt on earnings and free cash flow.
Currently, the company's shares trade at a price-to-earnings (P/E) ratio of about 14. If you look beyond the volatile years of Covid-19, that's not unusually high for stocks.
If the improving balance sheet can generate higher profits in the future, Carnival shares could be a great value. I definitely think this should be looked at closely by 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 fell from 22p to 2p from 2022. That's why the P/E multiple is high despite the stock being down 20% over the past five years.
The main reason is the weak construction product 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 been rising at the fastest rate in three years. And this can give a big boost to house builders, leading to higher demand for bricks and other materials.
Another potential risk to Ibstock is that house building techniques may change to less reliance on bricks. There are some signs of this happening elsewhere, especially in Europe.
Overall, however, the company looks set to benefit from a restructure, but the share price arguably does not reflect this. That's why I think it's one that serious investors should consider.
Chances of value
Most of the time, stocks are cheap for a reason – it's because there are persistent problems with the underlying business. That is one of the risks with value investing.
With Carnival and Ibstock, however, I don't think this is the case. Both have faced challenges recently, but I believe there is a good chance that these are temporary.
When things will start to improve is hard to predict. But if they do, current prices could be good opportunities for investors looking for long-term returns.
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