Stocks
3 ASX stocks for those ‘buying the dip’
Recent market falls has pushed these three ASX stocks further into undervalued territory despite strong fundamentals, according to Morningstar analysts.
Australian shares have shed around 5% in the past month, the Morningstar Australia index shows. The collapse of Silicon Valley Bank and the ongoing fallout hit global markets hard last week, but a late Friday rally may suggest some investors are casting around for bargain-price buys.
Retail investors are frequently cautioned against 'buying the dip' as strategies attempting to capitalise on market downturns in the short-term can be undone if the market falls further. Bottoms can be easily misjudged, and buying early in such cases often amplifies losses.
However, market dips can also present investors a chance to buy long-hold positions in companies with strong fundamentals at better price points.
3 undervalued ASX stocks
For those investors seeking the silver-lining surrounding last week’s cloudy market, here are three ASX companies which have moved into either a 4- or 5-star territory in recent weeks.
For reference: a 4-star price rating means the stock is considered undervalued and a 5-star price rating means a stock is considered significantly undervalued.
Perpetual (PPT)
- Star rating: ★★★★★
- Fair Value: $33.00
- Moat: Narrow
- Uncertainty rating: Medium
An 11% fall last week has compounded an already difficult year-to-date for financial services firm Perpetual, which is trading 15% down since January 1, 2023.
At its current share price, Perpetual is trading at a 36% discount to Morningstar’s fair value estimate of $33.00, which was recently downgraded from $35.50.
Commenting on the company’s outlook, Shaun Ler says volume growth is expected to underpin the narrow-moat firm’s earnings recovery, despite a lower short-term forecast.
“We anticipate a sizable drop in fiscal 2023’s underlying EPS to approximately $1.95 per share, before growing at low single digits to fiscal 2027.”
“But we anticipate volume—and thus revenue—improvements to support earnings recovery,” he says.
Ler points to strong fund performance, alongside expanded distribution efforts as sources of share price growth for the company.
“We believe management’s initiatives will revive growth in earning and economic returns in the medium term,” he adds.
Bank of Queensland (BOQ)
- Star rating: ★★★★
- Fair Value: $8.80
- Moat: None
- Uncertainty rating: Medium
Among the smaller ASX listed-banks, Bank of Queensland appears to be one of the worst hit by the recent financial services sell-off, falling more than 4% over last week.
However, like all ASX-listed banks in the Morningstar coverage universe, Bank of Queensland’s fair price estimate remains unchanged by the global banking concerns, and shares are currently trading at around a 24% discount.
According to Morningstar analyst Nathan Zaia, the bank’s share price has underperformed in recent months compared to its peers—like comparably-sized Bendigo and Adelaide Bank— following the surprise departure of BOQ CEO George Frazis in November last year.
“We think management instability has added to concerns of cost overruns at a time the bank is undergoing a digital transformation, inflation is high, and competition for skilled staff is tight,” he added.
However, Zaia says the departure is unlikely to impact the bank’s growth plans.
“Changing leadership has resulted in strategic uncertainty, but we think the digitisation program to support loan and deposit growth, with productivity benefits, is largely intact.”
Smartgroup Corporation (SIQ)
- Star rating: ★★★★
- Fair Value: $7.50
- Moat: None
- Uncertainty rating: High
Currently trading at around a 20% discount to their fair value estimate, shares in employee management services provider Smartgroup have fallen almost 10% this month, following a strong rise since January to now trade around 20% up year-to-date.
The company offers a range of services to government and private employers including salary packaging, remuneration solutions and fleet management.
Following the release of the company’s 2022 results last month, Morningstar’s fair value estimate of $7.50 per share held firm, despite ongoing cost growth and limited vehicle supply hitting the company’s earning margins.
Commenting on the company’s recent performance, Ler says the above headwinds are transitory and anticipates strong growth as the supply of vehicles gradually normalizes.
“We anticipate this to help Smartgroup realise a fresh stream of settlement revenue, underpinning a material net profit after tax rebound in 2024,” he says.
“We expect Smartgroup to continue to dominate its markets.”
