In a hot-running market, investors might struggle to find cheap ASX 200 shares with significant upside potential.
One fund manager has identified a couple of stocks that it sees are trading at reasonable prices.
Domino's Pizza Enterprises Ltd (ASX: DMP) and Fletcher Building Ltd (ASX: FBU) are the picks, with both stocks down more than 30% this year to date.
Shares in pizza chain Domino's are more than 39% in the red, whereas Fletcher Building is down nearly 35%. Both have faced their share of struggles this year.
Despite the sell-off, the team at Lazard Asset Management see potential in these companies, believing in their long-term recovery and value. Let's take a closer look.
Fundie eyes cheap ASX 200 shares
What's helpful is knowing that cheap ASX 200 shares aren't just beaten-down stocks. A judgment on the underlying business is also needed.
Lazard's definition explains it well: "the cheapest and riskless stocks". Risk in this instance being poor quality businesses.
Still, Domino's and Fletcher Building are no strangers to recent struggles. Domino's has grappled with issues in Europe, Japan, and even Australia due to high inflation, while Fletcher Building is fighting a downturn in New Zealand's housing market.
Both stocks have been heavily sold this year as a result.
But Lazard portfolio manager Robert Osborn believes these challenges could represent opportunities.
Osborn recently added both companies to Lazard's Select Australian fund, according to The Australian Financial Review.
Lazard's selective, value-focused approach emphasises companies with strong fundamentals, even if it means weathering some near-term market pessimism.
Domino's and Fletcher both fit this mould, the firm says, despite their 2024 performance.
They probably feel like the worst names, and it's yet to be proven that they'll make us money, but we're buying good companies at reasonable prices
Fletcher Building recently took on a $NZ700 million equity raise to reduce its debt load.
This fundraising effort, paired with what Lazard sees as a potential rebound in the New Zealand housing market, made Fletcher an attractive buy for the fund. Osborn explains:
The market hasn't yet adjusted to the fact that Fletcher's earnings are likely to rise over the next few years as housing activity picks up again.
It's worth noting that this particular capital raise provided an opportunity for Lazard to buy more shares at a discount.
And the fund looks to be against the market here with this cheap ASX 200 share. The New Zealand House Price Index, which measures house price movement throughout the nation, has shown a declining trend from highs of 3.9% in May to just 0.3% in September.
What about Domino's?
Domino's shares were in a clear downtrend from January to September, with the stock repricing from $58 to $29 during that time.
It has since climbed to more than $35 apiece at the time of writing.
The global pizza franchise has faced challenges on the operations side – particularly overseas – but Osborn sees promising signs of a turnaround.
He sees the above headwinds as management-related, but he thinks the leadership team is on it and making the right changes.
And he has a point. Whilst inflation has fleeced many in hospitality and quick-service restaurants, the thought of convenient pizza delivery suddenly disappearing seems unrealistic.
Osborn's observation is fairly simple here, noting that "If they don't make money, no one will want to open a new store". Fair point.
But don't expect bombastic growth, he says. The fund manager predicts a more "sensible" approach moving forward.
This conservative growth outlook aligns with Lazard's preference for value over hype, especially as the pizza giant's rivals – such as Guzman Y Gomez Ltd (ASX: GYG) – are pushing more aggressive, high-stakes expansion strategies that Osborn feels are overvalued.
Goldman Sachs recently rated the stock a buy as well, with a $40 price target.
Foolish takeout
Lazard sees Domino's and Fletcher Building as potentially cheap ASX 200 shares. The fund manager believes the market is done punishing both. This is backed by a turnaround in the underlying businesses.
Time will tell if the firm is correct or not. Domino's is down 28% in the past year, whereas Fletcher has slipped 26%.
