Two 'very cheap' mid-cap shares tipped to rebound sharply

In a sea of red, these two well-known stocks are both trading higher Tuesday. Graeme Evans explains their newfound popularity. 

Lowly-valued Travis Perkins and Plus500 defied the doom-mongers today when reassuring updates offered hope of a return to form for this FTSE 250 pair.

Both stocks have headed south since hitting their respective record highs, with the downturn at Wickes owner Travis Perkins lasting considerably longer than the two-month decline recorded by spreadbetting firm Plus500.

Travis Perkins was trading at more than £20 in the summer of 2015, only for the impact of the consumer spending squeeze to help send shares down to more than half this level.

Some confidence was restored today, however, when Travis reported group third quarter like-for-like sales growth of 4.1%, better than the 3.6% forecast.

Deutsche Bank said the update would allow investors to focus on the positives at a group currently trading with a 2019 price earnings (PE) multiple of 8.3x. With shares at a five-year low, they noted that this valuation was below both the historical range for Travis Perkins and those of company peers.

The bank said:

"Travis Perkins offers a compelling opportunity for investors willing to look through near-term macro risks and seeking a market leader where the longer self-help potential is under appreciated by the market".

With a target price of 1,579p, their optimism is matched by analysts at Liberum, who believe shares have the potential to reach 1,525p.

Source: TradingView (*)      Past performance is not a guide to future performance

Liberum said it was encouraging that Travis continues to enjoy strong growth in its trade-focused divisions, with 7% like-for-like sales growth in the quarter.

The DIY market continues to be very challenging for Wickes, although there has been some moderation in pricing pressures over recent weeks. Progress on cost reduction should also mean that full-year forecasts are met.

On a 5.5x enterprise value multiple to 2019 underlying earnings, Liberum said Travis shares were "extremely unloved and look very cheap".

In contrast, Plus500 has been loved for much of this year after a string of profit upgrades helped shares to more than double during 2018.

But this spectacular performance, which was partly driven by demand for the trading of cryptocurrencies, came to an end in August at the start of a clampdown by European regulators on CFDs for retail investors.

With rivals CMC Markets and IG Index also squeezed, Plus500 shares are now trading with a PE multiple of 7.3x to 2019 earnings and a forecast dividend yield at a whopping 12.4%.

Analysts at Liberum believe Plus500 should be trading with a low-teens multiple, leading to their continued target price of £28. At Berenberg, they think there’s scope for Plus500 to establish a new record at 2,320p.

Source: TradingView (*)      Past performance is not a guide to future performance

They wrote:

"The valuations of all three listed CFD players have been severely marked down by the market over the last three months, pricing in cuts toearnings forecasts caused by the new regulations. We think this is overdone."

Berenberg said today's update from Plus500 backed its view that weak market volumes in the third quarter had exaggerated the perceived impact of the new regulations.

Revenues fell 14% to US$100.1 million in the third quarter, but were still up 86% across the first nine months of the year. Furthermore, the company has been boosted by a return to market volatility in the current quarter, leading to stronger trading and keeping the company on track to beat 2018 expectations.

Analysts at Liberum believe valuation multiples will rise as doubts around 2019 are dispelled by the operating performance. They said: "This is a business with amazing returns and is continuing to outgrow the market."

*Horizontal lines on charts represent previous technical support and resistance.  Red lines represent uptrends and downtrends.