Value investing, when there’s also a dividend yield for passive income, can make for incredibly rewarding returns. In my opinion, Midwich Group (LSE:MIDW) is one of the most attractive of these opportunities on the market right now.
This specialist distributor of audio-visual technology sells displays, broadcast equipment, and lighting, among other tools. I’m particularly attracted to it because the consensus of four Wall Street analysts covering the company is that it could reach a price target of £5.59 by July 2025. That means a potential gain of 47.3%, and I think the growth could continue if I hold the shares for the long term.
I see an opportunity
Over the past 12 months, Midwich shares have taken a tumble after the company began reporting contractions in revenues and earnings per share. However, Wall Street analysts have forecasted this isn’t going to last. Forecasts show a future three-year-average earnings per share growth rate of 10%. The recent setback in business results sent the shares down 46% from their all-time high. I think that makes for a resounding opportunity.
It’s difficult to know when the end of a sell-off is. However, I think this might be as cheap as the investment is going to get. Any further drop in price before it begins to gain upward momentum is unlikely to hurt the overall price performance if I buy it now, in my opinion.
Midwich has a price-to-sales ratio of just 0.3 and a price-to-earnings ratio of just 14. Over 10 years, its median price-to-earnings ratio has been roughly 30. That means it’s selling at a significant discount.
Value investing can be highly lucrative
The great thing about value investing is that the valuation contracts on the way down but expands on the way up. This means that the market will begin to price the shares disproportionately to its growth in earnings and revenues once the company begins to report success. This is why investing before a bull run begins can be so profitable.
My prediction is that the price-to-earnings ratio will expand to roughly 20 by July 2025. The Wall Street consensus is that its earnings per share will be £0.27 in December 2025. However, I think the market is going to price this into the shares early. I think in July 2025, the shares could be worth £5.40. This means a potential gain of 42% from the current price of £3.80.
Being conscious of risks is wise
Of course, there is the chance that the company doesn’t manage to attain the strong results currently forecasted on Wall Street. Currently, Midwich has less than a 1% share of global audio-visual business. So, there are lots of competitors that could inhibit it.
I’ll certainly be cautious and make sure this investment is no more than 5% of my total portfolio. After all, its history of volatility in earnings and free cash flow has certainly made for a less-than-stable investment in the past. That’s why its so important I invest at the current low valuation.
It’s a rare find
Last but not least, Midwich has a 4.3% dividend yield. This gives me even more reason to hold this undervalued gem for years to come. It’s top of my watchlist right now, and might be the next shares I buy.
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Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
