Data Insights

Are these the 5 most undervalued stocks on the ASX?

Thu 18 May 23, 7:30am (AEST)
Coal 3 Mining
Source: iStock

Key Points

  • Resources and energy stocks are dominating the list of ASX listings with low P/E.
  • Defensive and low-risk stocks, such as in staples and healthcare, are priced high to earnings in the current environment.

Volatile times normally call for investing in defensive stocks. But investors looking to find value in defensive investments might need to look elsewhere in the current environment. In fact, based on current P/Es, defensive investments are looking expensive, and you might be surprised what is looking cheap.

Based on historical ranges, energy and resources are trading at a significant discount, while healthcare and staples are trading at a premium.

“Almost all the typical places investors like to hide in a recession, such as consumer staples and defensives, look very expensive relative to history. Buying at such large premiums in the past has generally led to substandard returns,” says Daryl Wilson, Affluence Funds Management.

He has focused on low P/E stocks along with energy and resources in his portfolios, according to his most recent report.

ASX 200 valuation premium of selected sectors relative to historical ranges April 2023
Source: Goldman Sachs Investment Research April 2023

The data suggests that low P/E stocks are cheaper than they’ve been in years and high P/E stocks are more expensive than they’ve been in years.

Discount or premium for P/Es compared to 20-year average. April 2023
Source: Goldman Sachs Investment Research April 2023

The latest low P/E scans on Market Index reflect this data, with 3 of the companies with lowest P/E in the resources sector. But are they actually undervalued?

Top 5 low P/E stocks 17.5.23
Source: Market Index, 17 May 2023

Genesis Minerals (ASX: GMD)

1 year Genesis prices 17.5.23

Genesis Minerals is a gold mining company based in Western Australia. It is currently in the process of acquiring St Barbara’s Leonara assets which will see its gold production growth increase to over 300,000 ounces per annum.

According to Tim Serjeant, Portfolio Manager at Eley Griffiths Group, people have been avoiding the gold sector due to operational challenges, but he believes the sector can rally.

“If that transaction [the purchase of the Leonora assets], as it probably should in June and July, I think that stock is going to be one that the market embraces.”

Whitehaven coal (ASX: WHC)

WHC 1 year prices 17.5.23

One of Australia’s leading coal producers, Whitehaven Coal has had strong results in the last year. It had a big 2022 where it paid out significant dividends. But is there more to come?

Peter Gardner, Senior Portfolio Manager for Plato Investment Management, notes that 2023 is a tougher year for Whitehaven Coal but he still believes the company will benefit from global thermal coal dynamics.

“We saw Germany turn back on their coal-fired power plants after the Russian invasion of Ukraine. But the other area of the coal industry that people aren't taking note of is India. And India is just building more coal-fired power plants and their demand for coal is going up significantly, which isn't great for the environment, but it's good for producers like Whitehaven Coal,” he says.

On the flip side, Andrew Hamilton, Portfolio Manager for Antares Equities, points out that thermal coal prices are still significantly above the long-run average.

“There’s potential that the coal price falls a mighty long way and obviously, that’s going to flow straight through to the dividend,” he says.

Morgan Stanley recently highlighted Whitehaven Coal as its strongest conviction position.

Yancoal Australia (ASX: YAL)

YAL 1 year performance 17.5.23

The coal miner had record revenue back in its February half-year report but has continued to face concerns over falls in commodity prices.

Romano Sala Tenna, Portfolio Manager for Katana Asset Management, viewed the company’s prospects in a positive light. Not least because there has been long term structural underinvestment globally in coal mines while demand remains high.

“It’s ridiculously cheap and is going to generate super profits and super dividends for the next little while. But you always get an overreaction when a commodity price is rebasing, that’s what we’re seeing now,” he said in February.

BSP Financial Group (ASX: BFL)

BFL 1 year performance 17.5.23

BSP Financial Group is Papua New Guinea’s largest bank and services business clients across the Pacific. BSP is the lender in PNG, the Solomon Islands, Tonga, the Cook Islands, Samoa and Fiji. BSP serves both retail and corporate customers, and provides non-banking services through BSP Life, BSP Capital and BSP Finance.

It delivered K1.136bn in profit for the 2022 financial year, a 5.7% increase on the year prior. Investors looking for sustainable dividends should be wary as its track record is mixed on this front.

There’s little in the way of broker coverage on BSP Financial Group so is it cheap? You’ll have to dig into the fundamentals to decide.

Seven West Media (ASX: SWM)

SWM 1 year performance 17.5.23

Seven West Media is an integrated media company across broadcast tv, magazine and newspaper publishing and online.

Like other Australian media companies, it continues to struggle with lower advertising bookings in the wake of tougher financial conditions and uncertainty.

Goldman Sachs downgraded its rating of Seven West Media to a sell earlier this year, joining 6 other brokers in that view. Otherwise, there are 7 brokers positioning it as a hold and one as a buy.

Written By

Sara Allen

Content Editor

Sara is a Content Editor at Livewire Markets and Market Index. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and Macquarie Group. She also holds a degree in psychology which drives a continued fascination with how human behaviour drives and is driven by investments and market activity.

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