Three shares going cheap to snap up now

Each week, a professional investor tells us where she'd put her money: Bettina Edmondston, Saracen Global Income & Growth.

As a global investment analyst for Saracen, I take a bottom-up investment approach, focusing on the long-term fundamentals. We produce in-house templates that forecast the profit and loss account, balance sheet, and cash-flow statement for a given firm in detail for the next five years. The analysis of the impact of cash generation on the balance sheet over the long term helps to identify shares that will grow their dividend faster than the market expects.

Every template also includes a worst-case scenario. If the downside risk or probability of the worst-case scenario happening to a company is too high, I would avoid investing in its shares. This has helped us in the past to avoid some attractive-looking shares that eventually ran into difficulties. In the recent past this bottom-up approach has also uncovered some undervalued shares with long-term growth potential.

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Investing in a Japanese bank may sound a challenging proposition, given flat domestic loan growth and the squeeze on margins from negative interest rates. However, Mizuho Financial Group (JP: 8411) is an unusual bank. It has been unwinding cross-holdings, improving governance, and is set on a strategy to boost lending overseas.

Mizuho is also growing its non-interest income, which already accounts for more than half of revenues. It trades at a tempting valuation of around 0.5 times net book value and with a near-5% yield, despite the underlying improvements and stable earnings outlook.

H&R Block (NYSE: HRB) provides assisted and DIY tax return preparation in person, online, via desktop software and mobile applications and related services to the general public. Sales are primarily generated in the US and its territories, Canada and Australia. HRB prepares one in six of all tax returns in America. The core business has high customer retention rates, strong brand awareness and an unrivalled infrastructure.

HRB benefits from complexities in tax systems and further legislative changes to health care and immigration reforms should provide a favourable backdrop over the coming years. The shares had been very weak due to concerns about poor execution in the current tax financial year. However, this has provided an attractive entry point for the long-term investor.

Covestro (Xetra: 1COV) is the former material science division of chemicals giant Bayer. It was spun out in October last year. Its market share ranges from 15%-47%, depending on the end market. Product demand growth should average 5% per year. Margins are expected to increase as utilisation rates rise after an extensive capital investment in recent years.

Covestro is hugely cash-generative, but due to its market position it does not have much scope for mergers and acquisitions. So given its relatively low pay-out ratio, I believe the bulk of the cash will make its way to shareholders through a rising dividend.