I think the current TPG Telecom Ltd (ASX: TPM) share price and Flight Centre Travel Group Ltd (ASX: FLT) share price represent better value than Fortescue Metals Group Ltd (ASX: FMG) and Commonwealth Bank of Australia Ltd (ASX: CBA) shares.
2 shares to avoid
The valuation of an investment is always important — otherwise, it's speculation. You don't have to be a Melbourne University commerce graduate or hold a Masters of Finance from Macquarie. You can form an opinion on a share's valuation simply by looking at the company, its products, competitive threats and likely future.
For a company like Fortescue, you must also be honest with yourself and understand what you don't know. Let me explain.
Fortescue digs up iron ore, a steelmaking ingredient. It sells the iron ore to China. Last year, when Fortescue shares were trading for around $1.50 (they traded over $7 last month), Fortescue's debt was eye-watering and its future was bleak.
Fortunately, China implemented an even more eye-watering infrastructure spending package. As you can expect, the price of iron ore surged on the news that more steel would be needed. Profits jumped, the share price was revived and the debt has begun to shrink.
The point here is that no-one could have predicted what happened to iron ore with any certainty. Just like no-one can predict what will happen next.
You can make money from investing in resources businesses, don't get me wrong, but without knowing what the market will do next it is hard to get a handle on valuation. If I were to guess, I would say iron ore retreats from these levels. Therefore, Fortescue's recent share price rally might be overdone.
Commonwealth Bank shares are simply too expensive for me right now. As fellow Motley Fool writer, Tristan Harrison, pointed out earlier today, there are a number of risks to bank shares in the near future. Unfortunately, Commbank shares do not appear priced for these risks nor the cyclical nature of banking.
2 shares to buy
I would consider owning TPG Telecom and Flight Centre shares.
TPG Telecom is the growing broadband provider, which is also expanding into Singapore and pushing into the mobiles market. Following a recent selloff in its share price, it looks good value to me.
Flight Centre has a few more hairs on it. It has suffered over the past 24 months as rivals gained market share and it reported profit downgrades. One criticism of Australia's largest travel agent is that it has been slow to react to online, with companies like Webjet Limited (ASX: WEB) taking a bigger slice of the travel pie. However, with overseas growth continuing, a healthy cash balance, a decent dividend and cheap shares, I think it is one to watch in 2017.
