These 2 Blue Chips May Be Great Bargains

There’s one thing which most value investors believe in – and that is, the concept of reversion to the mean. It’s a simple idea, with the main gist being that both good things and bad stuff can’t last indefinitely.

Or, as investor Dean Williams puts it, it’s the concept “that something usually happens to keep both good news and bad news from going on forever.” Boom-bust cycles are great examples of reversion to the mean at work, as is how below-average valuations are followed by above-average results.

Bargain hunters looking to take advantage of the latter point at the moment may be interested with the rig builders Sembcorp Marine Ltd (SGX: S51) and Keppel Corporation Limited (SGX: BN4).

Sembcorp Marine, at its current share price of S$2.96, is valued at 11.2 times its trailing earnings. This valuation is nearly half the firm’s average price-to-earnings (PE) ratio of 19.3 for the decade ending 29 April 2015.

Sembcorp Marine's price-to-earnings (PE) ratio from 29 April 2005 to 29 April 2015

Source: S&P Capital IQ

Meanwhile, Keppel Corp’s trailing PE of 8.4 (at its current share price of S$8.76), is only two-thirds that of its average PE ratio of 12.9 over the 10 years through today.

Keppel Corporation's price-to-earnings (PE) ratio from 29 April 2005 to 29 April 2015

Source: S&P Capital IQ

Both companies, which are blue chips that are part of the Straits Times Index‘s (SGX: ^STI) 30 constituents, have current valuations that are way below their respective long-term averages and that can help set the stage for a possible reversion to the mean to take place.

That being said, it is worth noting that a share with a lower-than-average valuation can still result in painful losses if its future earnings would shrink drastically and overpower any reversion to the mean in the valuation.

It’s for this reason that investors ought to also carefully consider the business prospects of any share before making an investment even if it has an enticing valuation. Sembcorp Marine and Keppel Corp are no exceptions.

For more investing analyses and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.