In this article, we discuss the 10 best undervalued UK stocks to buy now. If you want to read about some more undervalued UK stocks, go directly to 5 Best Undervalued UK Stocks to Buy Now.
The United Kingdom economy has been in turmoil as a result of the separation from the European Union, political instability, high inflation, and slow growth across the globe. Investors are thus hesitant to invest in companies based in the country. However, there are many undervalued stocks in the UK market that offer significant growth potential at bargain prices and have pricing power to weather the macro conditions. UK markets are expected to go through a significant multi-year fiscal tightening plan in the next few years.
This tightening will amount to around £70 billion, 2.5% of the Gross Domestic Product (GDP), by 2025. These predictions have forced investment advisors like JP Morgan to revise their UK growth forecasts by assuming a further 0.2 percentage point drag in the fourth quarter of 2022, taking the hit from over the next year closer to 0.8%. One of the major market indicators in the UK is the performance of the FTSE 100 Index, a major stock market index which tracks the performance of 100 most capitalized companies traded on the London Stock Exchange.
FTSE 100 companies represent about 80 percent of the entire market capitalization of the London Stock Exchange. It is a free-float index. The index recently hit a low of 7,500 points after a stronger-than-expected US jobs report dashed some hopes of a policy pivot in the UK. However, it recovered some ground amid a rebound in heavyweight value shares, mimicking the performance of US-based solid companies like Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO), and The Procter & Gamble Company (NYSE:PG).
In November 2022, the export-oriented index rallied almost 7%, the best monthly performance since November 2020, igniting hopes of a recovery. The yield on the UK’s 10-year government bond, also called gilt, fluttered around 3.1% at the start of December, remaining close to its lowest level since early September. Recently, the deputy governor of the Bank of England backed more interest rate hikes but clarified the government would consider cutting rates if the economy developed differently to expectations.
Other economic experts in the UK have also predicted that rates are likely to rise this year, be on hold the next year, and will then start falling in 2024. In order to sum up, the markets are betting on a 50 to 75 bps increase at the next December meeting of the central bank. Investors can take advantage of this temporary slowdown in the UK market to pick up shares of undervalued firms at discount prices. Since these firms have established businesses, their shares are most likely to rally in the coming months as the economy recovers.
However, there is reason to proceed with caution in this regard. According to the central bank, although the economy might technically avoid a recession, it would still shrink by around 0.25% through 2023. The unemployment rate in the next few months is also likely to rise to around 5.5%. Per the central bank, households might see the biggest squeeze to their incomes since records started being kept in 1964. Energy prices are also set to rise further in Europe as the Russian invasion of Ukraine prolongs.
As a result of higher inflation, the government in the UK is also under pressure to raise taxes on oil and gas firms, which have seen profits surge due to rising energy prices. These taxes are meant to fund measures aimed at helping families with low incomes during the coming economic crisis. Supply disruptions due to the virus crisis in China and the Ukraine war have also contributed to the rise in inflation over the past few months in the UK. Inflation is now at its highest levels in the country since 1982.
However, there is reason to proceed with caution in this regard. According to the central bank, although the economy might technically avoid a recession, it would still shrink by around 0.25% through 2023. The unemployment rate in the next few months is also likely to rise to around 5.5%. Per the central bank, households might see the biggest squeeze to their incomes since records started being kept in 1964. Energy prices are also set to rise further in Europe as the Russian invasion of Ukraine prolongs.
Our Methodology
The firms based in the United Kingdom were selected for the list. The companies with a PE Ratio of around 20 or less were preferred. The analyst ratings of each company are also discussed to provide readers with some more context about their investment decisions.
Best Undervalued UK Stocks to Buy Now
10. Standard Chartered PLC (LSE:STAN.L)
PE Ratio: 9.37
Standard Chartered PLC (LSE:STAN.L) provides various banking products and services primarily in Asia, Africa, Europe, the Americas, and the Middle East. The company operates through two segments: Corporate, and Commercial and Institutional Banking. On October 17, Standard Chartered PLC (LSE:STAN.L) posted earnings for the third quarter of 2022, reporting earnings per share of $0.33. The net profit over the period was $1.07 million.
Standard Chartered was formed in 1969 through the merger of two separate Banks, Standard Bank of British South Africa and the Chartered Bank of India, Australia and China. With a rich international history, today Standard Chartered is one of the world’s leading banks across Asia, Africa and the Middle East.
Just like Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO), and The Procter & Gamble Company (NYSE:PG), Standard Chartered PLC (LSE:STAN.L) is one of the undervalued stocks that elite investors are buying.
9. Imperial Brands PLC (LSE:IMB.L)
PE Ratio: 12.82
Imperial Brands PLC (LSE:IMB.L) manufactures, imports, markets, and sells tobacco and tobacco-related products in Europe, Americas, Africa, Asia, and Australasia. It offers a range of cigarettes, fine cut and smokeless tobacco, papers, and cigars. The company was founded as the Imperial Tobacco Company in 1901 by a consortium of British tobacco manufacturers seeking strength through unity following an attempt by James Buchanan Duke of the American Tobacco Company to take over the British tobacco industry.
Some of the major brands owned by Imperial Brands PLC (LSE:IMB.L) include Davidoff, Gauloises, JPS, West, L&B, Winston, Parker & Simpson, blu, Pluze, Zone-X, Kool, Horizon, Backwoods, Skruf, Golden Virginia, Rizla, and Dutch Masters. The company is based in Bristol and was founded in 1901.
8. Centrica plc (LSE:CAN.L)
PE Ratio: 9.63
Centrica plc (LSE:CAN.L) operates as an integrated energy company in the United Kingdom, Ireland, Norway, North America, and internationally. The company operates through British Gas Services & Solutions, British Gas Energy, Centrica Business Solutions and Energy Marketing & Trading. On August 9, UK’s Centrica plc (LSE:CAN.L) said that it signed a 15-year supply deal with Delfin Midstream at $8.45 billion for liquefied natural gas from a planned LNG export facility off the coast of Louisiana.
Centrica plc (LSE:CAN.L)’s adjusted operating profit for the first six months of 2022 rose to 1.34 billion pounds ($1.55 billion), up from 262 million a year earlier. Centrica plc (LSE:CAN.L) was formed in February following the British Gas plc demerger, which was renamed BG plc at the same time. British Gas’ Gas Sales and Gas Trading, Services and Retail businesses, together with the gas production business of the North and South Morecambe gas fields, were transferred to Centrica.
7. Oakley Capital Investments Limited (LSE:OCI.L)
PE Ratio: 2.28
Oakley Capital Investments Limited (LSE:OCI.L) is a private equity and venture capital firm. The company specializes in investments in early, growth, late stage, mid markets, restructuring, and re-financings. It also has experience in management buy-outs, management buy-ins, public to privates, secondary purchases, growth capital, turnarounds, industry consolidation, business roll-outs and buy-and-build investments.
Oakley Capital Investments Limited (LSE:OCI.L) has an impressive earnings per share growth that makes the stock a bargain at present prices. Compounded over the past three years, the firm has annual EPS growth of 43%.
Oakley Capital Investments Limited (LSE:OCI.L) is also growing in terms of revenue. In the past twelve months, the company has registered 105% growth in the revenue space, clocking in £339 million during the period.
6. British American Tobacco p.l.c. (NYSE:BTI)
PE Ratio: 14.60
British American Tobacco p.l.c. (NYSE:BTI) provides tobacco and nicotine products to consumers worldwide. Some of these products include vapor, tobacco heating, and modern oral nicotine products like combustible products, and traditional oral products, such as snus and moist snuff. The company is based in London and was founded in 1902. It has consistently paid a dividend to shareholders for the past twelve years. Over the past three years, these payouts have registered consistent growth as well.
On December 1, investment advisory JPMorgan maintained an Overweight rating on British American Tobacco p.l.c. (NYSE:BTI) stock and lowered the price target to 4,000 GBp from 4,500 GBp. Analyst Jared Dinges issued the ratings update.
At the end of the third quarter of 2022, 14 hedge funds in the database of Insider Monkey held stakes worth $1.7 billion in British American Tobacco p.l.c. (NYSE:BTI), compared to 17 in the preceding quarter worth $2.3 billion.
Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in British American Tobacco p.l.c. (NYSE:BTI) with 33 million shares worth more than $1.1 billion.
In addition to Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO), and The Procter & Gamble Company (NYSE:PG), British American Tobacco p.l.c. (NYSE:BTI) is one of the undervalued stocks that elite investors are buying.
In its Q1 2022 investor letter, Distillate Capital Partners LLC, an asset management firm, highlighted a few stocks and British American Tobacco p.l.c. (NYSE:BTI) was one of them. Here is what the fund said:
“Distillate Capital’s International FSV Strategy is less expensive, more fundamentally stable, and less levered than the benchmark All Country World Ex U.S. (ACWI-EX US) Index.The largest new position is British American Tobacco p.l.c. (NYSE:BTI), which was not owned previously due to leverage, but now passes that threshold and offers an 11% free cash flow to market cap yield.”
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Disclosure. None. 10 Best Undervalued UK Stocks to Buy Now is originally published on Insider Monkey.