I, like many investors, crave undervalued stocks. Not only do they have untapped potential, but often they’re incredibly affordable. Here are two companies I think fit that criteria and that I intend to hold for a decade to maximise returns.
A light at the end of the tunnel
If reports that Omicron really does cause milder symptoms are true, then I think we could actually be seeing the light at the end of the tunnel. And if that is the case, then the first thing I’ll be doing is booking a holiday.
I’ve already outlined my hesitancy about investing in airlines in 2021. I thought that many investors were overly optimistic about a return to normal and have been burned by lockdown after lockdown. But now the easyJet (LSE: EZJ) share price is 621p, 32% lower than this summer’s high of 921p. Its price-to-earnings ratio (P/E) sits at 12.8, only a little higher than the last 13 years median of 12.69. If the pandemic continues to wind down in severity, then I think we could see a much larger boom in value as we approach the summer.
But there’s no sugar-coating the fact that easyJet has suffered a lot over the pandemic. It will need to find inventive ways to maximise revenue in the coming years. But, against the odds, it survived and has managed to minimise losses at every turn. Cash burn was inevitable, but easyJet was able to keep it to £36m per week, a full £4m below the expected £40m. This resilience in the face of disaster has really impressed me and I can’t wait to see what the company does in better times.
A cheap but valuable digital service
Wise (LSE: WISE) makes it simple and inexpensive to move money across currencies and bank accounts. This UK IT firm went public in early 2021 and its stock price soared to 1,150p in September before plummeting to 678p at the time of writing. This is pretty normal for a company following an IPO since it takes time for the market to identify a share’s actual worth. Right now, the stock’s P/E ratio sits at a very low 5.16, meaning the price of the shares are closely aligned with the company’s earnings.
If I had any doubts about the health of the company, I need only look at customer and revenue growth over 2021. Revenue nearly quadrupled while Wise provided services to 10 million customers, up four million from 2020.
One thing I’m concerned about though is the company’s small profit margins. Earnings have fallen as the company has looked to expand into new markets. The smaller margins of course put Wise on shakier ground. If there’s a big black swan event in the global economy it could send it off balance. But, having said that, the pandemic was the ultimate black swan event and Wise has not only survived, but thrived. As life returns to normal, I think Wise, like easyJet, has the potential to benefit massively from pent-up travel demand.
Truly undervalued shares are hard to find, but I think these companies have both shown extraordinary resilience in the face of disaster. Now that their shares have fallen in price, I believe they will make excellent additions to my long-term portfolio.
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James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
