Investors love a bargain. The only thing better than buying 'a great company at a good price', as Warren Buffett so often advocates, is to buy a great company at an outstanding price.
Unfortunately, this can lead investors to focus on the price rather than the quality, which sees falling companies receive attention that they probably shouldn't.
Two recent losers that look quite cheap today are Insurance Australia Group Ltd (ASX: IAG) and Origin Energy Ltd (ASX: ORG).
Insurance Australia Group ("IAG") shares have fallen 20% in the past year, and investors will be eyeing its Price to Earnings (P/E) ratio of 12 and its dividend yield of 6% – fully franked! – with some avarice.
While the company appears to be a solid income play, I believe that its growth outlook is limited and that the company has some risks both as a result of the highly competitive insurance industry and its stated intention to further expand into China.
Not a terrible investment per se, but one that is unlikely to achieve market-beating returns, even at today's low prices.
Although IAG may just be a mediocre investment, I feel that Origin Energy Ltd is a legitimate value trap, and I have been bearish on the company for many years. In the past 10 years, Origin Energy – like IAG – has actually destroyed shareholder value by falling 5% during that time.
This is not the performance of a company with a market-beating edge and the many analysts who placed buys on the stock have consistently been wrong. With enormous debt and a weak outlook, I to believe that Origin remains a value trap despite the upcoming completion of its GLNG plant, a P/E of 9 and a 7.6% dividend.
Instead of IAG or Origin, readers should take a closer look at Retail Food Group Limited (ASX: RFG), which also trades on a low P/E of 12 – below the market average – and offers a winning 6.2%, fully franked dividend.
RFG's earnings are supported by a diverse variety of franchises including Gloria Jeans, Donut King, and Pizza Capers, it has outstanding positive cash flow (supporting its dividend and growth plans) and 25% of its earnings before tax are expected to come from overseas by 2018 – great news with a weak Aussie dollar.
It's no coincidence that I recently bought shares in Retail Food Group.
