Down 41%, this cheap stock could be 69% undervalued and offers a 7.3% dividend yield!
B&M European Value Retail (LSE:BME) has seen its market-cap collapse in recent years, plummeting the business into cheap stock territory. But with new leadership at the helm, some institutional investors have started questioning whether the negative sentiment among investors is truly deserved.
In fact, the analyst team at Berenberg Bank has recently reiterated its Buy recommendation with a 300p share price target. And while the experts at Citi are still on the fence with a Hold recommendation, they still hiked their share price target earlier this month.
Compared to where the stock’s trading today, that means investors could be looking at a near-70% capital gain over the next 12 months, paired with a tasty-looking 7.3% dividend yield.
So is this cheap stock a no-brainer?
A bit of context
With inflation driving up the cost of living, discount retailers have been largely thriving and taking market share away from leading supermarkets like Asda and Sainsbury’s. However, despite being a prominent discount retailer, strategic missteps meant B&M almost entirely missed out on this tailwind.
Poor forecasting of consumer demand for certain product lines resulted in an inventory surplus of slow-moving products. This error ultimately led to slower sales and margin erosion as B&M was effectively forced to heavily discount these items, resulting in a painful series of profit warnings.
Skip ahead to October last year, and an accounting scandal revealed £7m of additional freight costs that hadn’t been recognised, leading to the resignation of its CFO. And when combining this series of disappointments with lost market share and higher labour costs, it isn’t surprising that investors quickly started jumping ship.
A hidden opportunity?
We’re now in 2026, and B&M has a new leadership team at the helm, aiming to get the business back on track, starting with product line simplification and re-establishing B&M’s value perception among consumers.
The latter’s definitely the harder endeavour, especially in a fiercely competitive retail marketplace. And yet, there are signs this strategy’s working. In December, like-for-like sales returned to positive territory, albeit by a small amount.
It’s possible this was just a one-time fluke supported by usual Christmas spending activity. But it’s worth pointing out that this sales momentum continued into January. And if this like-for-like sales trend has continued, it could confirm December as a key inflexion point for this business as it undergoes a multi-year turnaround strategy.
This hopeful outlook is why B&M shares are actually up 9% year to date. And with the shares still priced at just 7.6 times forward earnings, Berenberg’s aggressive forecast may be fulfilled if the company’s next set of earnings shows continued recovery progress.
The bottom line
With B&M still priced as a dirt-cheap stock, it’s clear that not every investor’s convinced, myself included. While the firm’s latest results are undoubtedly encouraging, the recent spree of broken investor promises and earnings misses means I’m keeping the business on a short leash.
However, if management continues to deliver promising recovery progress, I might have to rethink it. That’s why I believe investors should consider keeping a close eye on this stock throughout 2026.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. 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.
