Even big companies can make good bargains when they offer something other investors may not have noticed. That's what Wesfarmers Ltd (ASX: WES) and Leighton Holdings Limited (ASX: LEI) have going on right now.
A lot of times a stock becomes a bargain after the company takes a turn for the worst and investors (justifiably) dump it in search of better deals. Then, it takes time to redeem itself through restructuring and belt-tightening.
Leighton Holdings finds itself in this position. It is trying to sell off assets and maybe even a few subsidiary businesses to right itself. Revenues are improving, yet one big sticking point is the gigantic amount of work it needs to get paid for, and its limited ability to collect on it. It may be on the balance sheet as an asset, but it can't lift earnings if it isn't collected.
A new CEO and a reshuffled board is now in place to correct that, but it will take time. Much longer than many investors may care to wait, so the share price is held down. For the long-term Foolish investor who likes low-priced stocks and high yields, this could be the one.
The dividend yield is a huge 5.8% partially franked and earnings are forecast to rise around 6% annually for the next two years. It's not a barn-burner in growth right now, but as the company returns to good form, the value begins to flow more. Time is what unlocks that value. If you are looking for a turnaround stock to have some surprising portfolio returns while you rake in a blue-chip yield, then I think Leighton can deliver on that value.
Wesfarmers is at the other end of the spectrum. There's nothing wrong with its finances or performance in general, so where is the value that makes it a bargain? It's in the potential for further expansion that people can't see yet.
With businesses like Coles supermarkets, Bunnings Warehouse, K-Mart and Target, you could say it is a very established company. Bunnings has outstanding growth, but Coles mostly grows at the pace of the general economy. Wesfarmers has sold off its insurance businesses recently, but it wants to enter financial services because it is one market big enough to make a material difference for the retailing giant.
If it gets involved in personal finance lending or even residential loans, that would open new income streams to propel earnings even higher. Wesfarmers is sitting on a multi-billion dollar war chest that could be deployed for acquisitions into this market. It's not clear right now, but even Woolworths Limited (ASX: WOW) is considering moving in the same way, so Wesfarmers won't want to be left out of this party. While investors wait to see what is brewing for the company, they can get paid a hefty 4.8% yield fully franked for their time and patience.
