Not too long ago I was thinking that potential bargains were getting hard to find. The past two months have put paid to that idea, with a number of big companies falling dramatically. Here are 4 businesses that I'm watching right now:
Reject Shop Ltd (ASX: TRS)
Shares in this bargain-bin retailer have been smashed following the news that poor sales would see the company report a heavy loss in the second half of the year. If I knew for certain that this was a one-off hit and that profits would return to last year's levels ($17 million) then the company would be screaming cheap; priced at about 6x earnings or on an EV/EBITDA ratio of 3-ish.
However, I don't know that for certain and it is difficult to evaluate how long-lived the lower sales will be (the company will make a loss this half). As a result, I'm not a buyer of Reject Shop just yet.
TPG Telecom Ltd (ASX: TPM)
Along with Vocus Group (below) and Telstra Corporation Ltd (ASX: TLS), TPG shares have been sold off heavily in recent times. This is partly due to the recent discounted capital raising at $5.25 a share, but more broadly the market seems to believe that increasing competition in the sector will lead to lower margins for all the players. TPG and Vocus appear worthy of further investigation, and I'm in the process of looking at them more closely.
Vita Group Limited (ASX: VTG)
Vita Group is starting to look very cheap, with a large trailing dividend. Shares are likely cheap because of the uncertainty surrounding the recent change to the group's remuneration structure, which will result in it managing more Telstra stores but generating lower profit margins from them.
Unfortunately the company has more leaks than a barbed wire canoe, and I have zero confidence in my ability to buy shares without being taken advantage of by more-informed people close to the company. This one's on my wait-and-see list.
Vocus Group Ltd (ASX: VOC)
I'm looking closely at Vocus Group because I perceive it to be the cheapest telco, although I'm still in the process of evaluating whether it or TPG might have the stronger competitive position. There is considerable uncertainty in the sector, and the opportunity for growth in market share as customers switch to the NBN. With 6% market share at present, Vocus certainly has plenty of room to grow.
I believe that the company with the lowest costs, best customer service, and greatest ability to attract customers will likely be the winner – I'm just not sure who that is yet.
