Investors on the hunt for cheap stocks are often drawn to the high-risk small-cap end of the market where companies like The Reject Shop Ltd (ASX: TRS) or Myer Holdings Ltd (ASX: MYR) trade cheap on conventional valuation metrics due to operating struggles or structural headwinds that place them in the turnaround basket.
However, the star stock pickers at the L1 Long Short Fund Ltd (ASX: LSF) that returned an impressive 36.9% per year net of fees to investors from September 2014 to February 2018 have made a compelling case for one blue-chip ASX share they think is scarily cheap.
Of course, they may not be right as even the best stock pickers make mistakes. For example, since April 2018 the fund has lost around 10%, but it's worth taking a look at what looks a compelling case for this ASX blue-chip share.
News Corp Ltd (ASX: NWS) is labelled as "dramatically undervalued" by L1 Capital, which reports that News Corp has no debt and "and approx. $2.4b of net cash (almost 25% of its market cap)."
L1 also claims "the firm's assets apart from REA & MOVE are currently being valued at close to zero," with the giant cash balance also giving it the options to grow by acquisition or return more cash to investors.
The fund manager is forecasting "double-digit" growth for the "foreseeable future" for News Corp thanks to the strength of its three key assets in digital real estate leader REA Group Limited (ASX: REA) (News Corp owns 61.6% of REA Group), the US online property realtor Move Inc. and world-famous business newspaper The Wall Street Journal.
In total, L1 calculates that News Corp's digital assets and cash combined are worth $9.9 billion, which means its market cap of $10.5 billion reflects virtually no value in its giant suite of publishing, news, and cable television networks.
L1 has flagged how the digital offerings are "capital light" businesses that require little ongoing investment and therefore offer excellent free cash flows to investors.
According to the fund manager News Corp trades on an EV/EBITDA ratio of just 6x and 10%+ free cash flow yield.
It does look cheap on L1's view, but investors should remember News Corp's traditional media and publishing businesses are facing some powerful structural headwinds.
