Three undervalued stocks to snap up

Each week, a professional investor tells us where he'd put his money. This week: Simon Gergel, Merchants Trust.

While it is hard to predict how the UK economy will react to the Brexit referendum result over the coming months, the stockmarket has recovered from any initial weakness, with overseas earners performing particularly well. The FTSE 100 index has moved back towards the top of its trading range for the last three years. However, there has been extreme divergence within the market. The more defensive earners, such as food and beverage producers and tobacco stocks, offer little value but there are good investment opportunities elsewhere.

We look for strong businesses with attractive structural drivers that are undervalued in the stockmarket. We would highlight three areas offering value today. First, there are specific recovery situations, where the longer-term quality of a business is not being reflected in the share price due to short-term uncertainties. Second, firms offering structural growth that is undervalued for specific reasons. Third, a number of the mega-cap stocks offer good value, even after good recent performance.

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An example of a recovery stock is the bookmaker Ladbrokes (LSE: LAD). After a few difficult years, the company has started to produce much stronger growth in its online operations and encouraging results in its betting shops. The proposed merger with Coral will enhance its position in digital gaming and provide significant cost savings. The shares have started to recover in recent months, but the combined business remains modestly valued.

One structural growth stock we own is Inmarsat (LSE: ISAT), a satellite communications company that specialises in marine, aviation and other mobile communications markets around the world. There is strong growth in demand for high-bandwidth connectivity on ships, civil and military aeroplanes, and elsewhere. Inmarsat has global capabilities that support its leading position in the maritime market and its trusted position with governments. The latest generation of satellites should enhance its growth as new applications, such as Wi-Fi on planes, become more widespread.

The shares offer particularly good value at the moment, with a 5% dividend yield, as a heavy investment phase has depressed cash flows at a time when the maritime industry is struggling. We believe that Inmarsat's licences, spectrum, satellite fleet and customer base are extremely valuable assets.

Within the mega-caps, we own a large position in GlaxoSmithKline (LSE: GSK). For several years this pharmaceutical business struggled as major drugs lost patent protection, and their pipeline could not fill the gaps. Following a transformational deal last year, the company is now a world leader in the vaccines and consumer-health markets, while its pharma business is showing better growth, particularly for its HIV therapies. Its modest valuation reflects historic issues more than the improving quality of the business.